Fed to Let Bank Holding Companies Count Part of Their Debt as Capital

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Fed to Let Bank Holding Companies Count Part of Their Debt as Capital

The Federal Reserve Board voted on Friday to permit bank holding companies to count a limited amount of perpetual debt as primary capital.

The action by the central bank was intended to increase the sources open to banking firms to meet stiffening capital requirements. However, no U.S. banks yet have issued perpetual debt, Fed staffers said, and none are likely to unless foreign governments grant the debt instruments favorable tax treatment.

In the United States, according to Anthony C. Cornyn, assistant director of the Fed's financial analysis and special studies section, the Internal Revenue Service is expected to view the instruments as equity issues that pay dividends. Thus, the issuer will not be able to deduct the interest payments and the securities will be no more attractive than equity issues.

To count as primary capital under the guidelines approved on Friday, the securities must be unsecured and subordinate to the claims of depositors. Also, the securities--which are known as perpetual because they do not mature--can be redeemed only with approval from the Fed.

The Fed decided that perpetual debt, perpetual preferred stock, and mandatory convertible securities could make up no more than 50% of a bank's primary capital. The remainder consists of common stock, the reserve for bad debts, and the holding company's minority interest in consolidated subsidiaries.

While bank holding companies can issue as much perpetual preferred stock as they wish, up to the 50% limit, a separate sub-limit was established so that perpetual debt and mandatory convertible securities could account for no more than 25% of primary capital.

Interest in the securities was sparked in 1984 when two British banks, National Westminster and Barclays, issued perpetual debt. …