On March 17, 2009, the Board of Governors of the Federal Reserve System announced that it was delaying until March 31, 2011, the implementation of limits on the inclusion of trust preferred securities and other “restricted” core capital elements for the purpose of calculating bank holding company Tier 1 capital.

The new capital calculation restrictions were originally adopted by the Board in March 2005 and were scheduled to become effective on March 31, 2009. These capital calculation restrictions would have required bank holding companies to limit the aggregate amount of “restricted core” capital elements, including trust preferred securities, eligible for inclusion as Tier 1 Capital to an amount not to exceed 25 percent of the sum of all core capital elements, including restricted core capital elements, net of goodwill, less any associated deferred tax liability. Further, under these rules, the aggregate of excess restricted capital consisting of trust preferred securities, Class C minority interests, term subordinated debt (excluding mandatory convertible debt) and limited life preferred stock that would have been eligible to be treated as Tier 2 capital was to be limited to a maximum of 50 percent of Tier 1 capital.

In light of the Board’s decision to delay implementation of the new restrictions, eligible or core capital Tier 1 elements continue to consist of:

• qualifying common stockholders' equity;
• qualifying noncumulative perpetual preferred stock (including related surplus);
• senior perpetual preferred stock issued to the United States Department of the Treasury under the Troubled Asset Relief Program (including related surplus);
• minority interests related to qualifying common or noncumulative perpetual preferred stock directly issued by a consolidated U.S. depository institution or foreign bank subsidiary; and
• restricted core capital elements.

Further, the aggregate amount of “restrictive core” elements consisting of cumulative perpetual preferred stock (including related surplus) and qualifying trust preferred securities that a BHC may include in Tier 1 Capital continues to be an amount up to 25 percent of the sum of: (1) qualifying common stockholder equity, (2) qualifying noncumulative and cumulative perpetual preferred stock (including related surplus), (3) qualifying minority interest in the equity accounts of consolidated subsidiaries and (4) qualifying trust preferred securities. Tier 1 Capital must represent at least 50 percent of a bank holding company’s qualifying total capital. The excess of “restricted core” capital not included in Tier I may generally continue to be included in the calculation of Tier 2 Capital.

Despite the delay in implementation of the new capital calculation limits, the Board continues to stress that bank holding companies intending to issue new “restricted core” capital elements must first consult with the appropriate Federal Reserve Bank.

For further information, please contact Michael D. Morehead, Timothy M. Sullivan, Mark F. Palma, or your regular Hinshaw attorney.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.