Fed Postpones Tightening of Bank Capital Quality Rules

The Fed has announced:

the adoption of a final rule that delays until March 31, 2011, the effective date of new limits on the inclusion of trust preferred securities and other restricted core capital elements in tier 1 capital of bank holding companies (BHCs).

The final rule explains:

Under limits on restricted core capital elements that are currently in effect, a BHC generally may include in tier 1 capital cumulative perpetual preferred stock and trust preferred securities up to 25 percent of the sum of core capital elements (including cumulative perpetual preferred stock and trust preferred securities). The new limits would limit restricted core capital elements includable in the tier 1 capital of a BHC to 25 percent of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. In addition, internationally active BHCs would be subject to a further limitation.

In particular, the amount of restricted core capital elements (other than qualifying mandatory convertible preferred securities) that an internationally active BHC could include in tier 1 capital could not exceed 15 percent of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability.

In light of conditions in the capital markets, the Board has considered whether an additional extension of the effective date of the new limits is appropriate. The economic conditions for the past 18 months, and currently, have created a situation in which requiring adherence to the new limits by the March 31, 2009, effective date creates a substantial burden for many BHCs in a way that was not anticipated when the final rule was adopted in 2005. In the prevailing market conditions, it is especially important for BHCs to expend efforts to increase their overall capital levels, although it is challenging to do so now through retention of earnings, the most typical means. Therefore, to promote stability in the financial markets and the banking industry as a whole, the Board has decided to further delay the effective date of the new limits until March 31, 2011. The Board believes that this extended transition period would allow affected BHCs sufficient flexibility to satisfy the Board’s risk-based and leverage capital guidelines during the current stressed market conditions.

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