Final Rule to Retain Trust Preferred Securities in Tier 1 Capital
March 11, 2005
Circular No. 11689

To All Depository Institutions and Others  
    Concerned in the Second Federal Reserve District:

In a press release, the Federal Reserve Board announced its approval of a final rule that allows the continued inclusion of outstanding and prospective issuances of trust preferred securities in the tier 1 capital of bank holding companies (BHCs). Under the final rule, trust preferred securities and other restricted core capital elements will be subject to stricter quantitative and qualitative limits.

The final rule limits restricted core capital elements to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liability. Internationally active BHCs, defined as those with consolidated assets greater than $250 billion or on-balance-sheet foreign exposure greater than $10 billion, will be subject to a 15 percent limit. But they may include qualifying mandatory convertible preferred securities up to the generally applicable 25 percent limit. Amounts of restricted core capital elements in excess of these limits generally may be included in tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits.

The requirement for trust preferred securities to include a call option has been eliminated, and standards for the junior subordinated debt underlying trust preferred securities eligible for tier 1 capital treatment have been clarified.

The final rule addresses supervisory concerns, competitive equity considerations, and the accounting for trust preferred securities. The final rule also strengthens the definition of regulatory capital by incorporating longstanding Board policies regarding the acceptable terms of capital instruments included in banking organizations' tier 1 or tier 2 capital.

The final rule will be effective on April 11, 2005.

Press release OFFSITE  
Federal Register notice OFFSITE pdf 
Board’s final rule OFFSITE pdf 

Lance Auer
Assistant Vice President
Financial Sector Policy and Analysis

William L. Rutledge
Executive Vice President