SRC Insights: Second Quarter 2004

Proposed Capital Treatment of Trust Preferred Securities

Recently released Financial Accounting Standards Board (FASB) guidance—FIN 46—changed the accounting treatment for trust preferred securities (TPS). Taking into consideration broad supervisory concerns and competitive equity considerations in addition to FASB's guidance, the Board of Governors has requested public comment on a proposed rule to change the regulatory capital treatment of TPS. As proposed, TPS would remain as a tier 1 capital element of bank holding companies (BHCs), but with stricter quantitative limits and clearer qualitative standards. After a three-year transition period, the aggregate amount of TPS and certain other capital elements in domestic BHCs would be limited to 25 percent of tier 1 capital elements, net of goodwill. The amount of these elements in excess of the limit could be included in tier 2 capital, subject to restrictions. The proposal would not affect how BHCs account for TPS on regulatory reports filed with the Federal Reserve. Consistent with longstanding direction, BHCs would continue to follow GAAP in accounting for these instruments for regulatory reporting purposes. Comments on this proposal should be submitted to the Board by July 11, 2004.

Analysis of the issues and discussion of the proposal is available in the Board's press release and attached proposal, both of which are available on the Board of Governors' website External Link . Additional analysis of the proposal will appear in the next issue of SRC Insights.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

SRC Insights: Second Quarter 2004

Proposed Capital Treatment of Trust Preferred Securities

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