New FDIC Article: “Trust Preferred Securities and the Capital Strength of Banking Organizations”

The winter release of the FDIC’s Supervisory Insights publication has a very interesting article on Trust Preferred Securities:

“Trust Preferred Securities and the Capital Strength of Banking Organizations” looks closely at the role of these hybrid securities during the financial crisis and highlights the fact that the use of TruPS in tier 1 capital enabled large bank holding companies (BHCs), as a group, to operate with substantially less loss-absorbing capital than permitted for insured banks. Evidence also suggests that institutions relying on these instruments took more risks and failed more often than those that did not include TruPS in tier 1 capital. The eventual elimination of TruPS from large BHC tier 1 capital, as mandated by the Collins Amendment and recent agreements by the Basel Committee on Banking Supervision, is expected to help move the U.S. banking industry toward a stronger capital foundation.