Last week the conference committee charged with reconciling the House and Senate versions of the federal financial reform bill began its formal deliberations, and this debate continues in open session.  The language originally proposed by Sen. Susan Collins (R-Maine) remains in the base text  on which reconciliation efforts will focus.  The Collins amendment would exclude trust preferred from the consolidated Tier 1 capital of banks and holding companies.  This would force an estimated $1.3 trillion in deleveraging and would affect the roughly 600 banks with less than $10 billion in assets that hold these securities as Tier 1 capital.  Here we provide an update on this aspect of the reform bill and its likely fate between now and the conference committee’s self-imposed July 4 reconciliation deadline.

Observers consistently note that FDIC has been the driving force behind this amendment and that it will continue to advocate for it.  Collins being a Republican, Democrats are not likely to dismiss her proposal out of hand during the reconciliation process—the reconciled bill will still need to garner a 60-vote supermajority to proceed to a final passage vote on the Senate floor.  As you may recall, the May 20 passage vote on the Senate bill (59-39 in favor) followed the narrowest of victories in the vote to end debate on it:   60-40.  In that vote, Collins joined just two other Republican Senators, including fellow Maine senator Olympia Snowe, and two independents in voting with Democrats for cloture.  Those five votes offset negative votes on the matter by two Democrats in an otherwise partisan passage vote.

Their possible influence notwithstanding, since the Senate’s May 20th vote on the bill, both Collins and the FDIC have expressed a willingness to soften the implementation of her proposal:

  • Collins, in a June 7 interview:  “I’m taking a look at all of these suggestions.  I will say that it’s clear to me from talking to the FDIC chairman that trust-preferred is a debt instrument and cannot easily be converted into common equity, and therefore I don’t think it should qualify as Tier 1 capital. Having said that, I recognize that there is a need for a transition period, and that’s what we are taking a look at.”
  • FDIC spokesman Andrew Gray on June 8:  “With respect to the Collins amendment, the FDIC supports grandfathering or providing a transition period for TruPS.  We’ve publicly acknowledged the need for special transition rules.”

That the impact of this provision is high on the conference committee’s radar has been confirmed by DC staffers we know.  For his part, Republican Senate conferee Judd Gregg said in an interview last week that the amendment “makes no sense.”  Though it was added to the Senate bill by unanimous vote on the Senate floor, he said “nobody knew about it” and that it “was a voice vote without anybody knowing about it.”  Representatives of both large and small banks have not been shy in expressing their opposition.

Investment analysts have noted that even a phase-in will not save trust preferreds from becoming a relic of banking history and that banks should be finding ways to retire these obligations during the next 18 months, regardless of how they are treated under the final version of the reform bill.  Despite the resistance of some investors, recent recapitalization solutions have included trust preferred buybacks.

We will provide further updates on the conference committee’s work on capital standards as it begins in earnest this week.