Trups Measure Harmful

Article excerpt

Byline: Mick Thompson

As members of Congress reconcile differences between the House and Senate financial reform bills, they must address a section of the base text for the bill that could have disastrous consequences for hundreds of community banks across the United States.

Section 171 of the base text, originally introduced as an amendment by Sen. Susan Collins of Maine, would exclude trust-preferred securities from Tier 1 capital for bank holding companies. I certainly support the senator's effort to enhance the quality of capital in financial institutions, especially in the wake of a financial crisis that exposed inadequate levels and quality of capital in our nation's largest banks.

However, despite claims that the amendment "tackles the 'too big to fail' problem," I fear Sen. Collins' amendment will only exacerbate the "too big to fail" problem by placing community banks at a further disadvantage to the money-center banks. More than1,000 bank holding companies with assets of less than $1 billionhave used trust-preferred securities. These organizations cannot be classified under any definition as "too big to fail," and yet it is these very institutions that will once again bear the brunt of the economic collapse and the resulting policy response.

Trust-preferred securities have proven to be a successful capital-raising mechanism for smaller institutions that have long relied on regulatory determinations permitting their inclusion in Tier 1 capital. While trust-preferred securities are a hybrid instrument at the holding company level, in most cases the proceeds flow down to the bank as loss-absorbing, common equity. …