It was that great philosopher of our time, Yogi Berra, who coined the saying, “It’s déjà vu all over again.” That quip came to mind recently when I learned that the Basel III capital standards strongly encourage the divestiture of any trust preferred securities (TRUPS) owned by a bank. The déjà vu part is that the banking industry fought this very issue in late 2013 and early 2014, when it was part of the implementation of the Volcker Rule under the Dodd-Frank Act. Then, as now, the rules would prohibit ownership of TRUPS through regulation.
In 2013, just days before Christmas, the bank regulatory agencies came out with a ruling stating that banks should divest themselves of TRUPS by the end of the year. These securities were held mostly by community banks throughout the country. Indiana banks held tens of millions of dollars of TRUPS, and those banks were being advised to dispose of them. The obvious problem was that the market was still depressed as a result of the financial crisis and, with nearly a billion dollars hitting the market all at once, the price would be further depressed. In an odd twist of fate, TRUPS were just beginning to recover from the financial crisis, and the banks that owned them were seeing interest payments pick up. As a result, the American Bankers Association filed a lawsuit against the regulators, many Congressmen signed letters requesting that regulators back away from this ruling which primarily harmed community banks, and bankers themselves sent letters and emails and made urgent telephone calls to regulators and Congressmen. Bear in mind, all of this occurred within 10 days of Christmas. The result in mid-January was that the regulators modified their ruling to provide a carve out for most of the TRUPS. However, on a going-forward basis, banks are not permitted to invest in TRUPS.
The banking industry had won ‒ or so we thought. Along comes this recent interpretation of the Basel III rules by the regulators. The rules are not intended for community banks, but the new interpretation winds up harming them. Furthermore, such a ruling makes less sense today than it did a year and a half ago, because no more TRUPS can be purchased, and the quality of the remaining TRUPS market is much higher.
Once again we will have to ask the regulators to apply some common sense to the new ruling. If they do not respond in a timely fashion, we will put forth a lobbying campaign and perhaps consider another suit. It is hard to believe that the regulators would want to face this situation again. Basel III should never be applied to community banks, since it is designed to cover international transactions. However, this provision specifically should be dealt with immediately to provide community banks with the chance to wind down their exposure to TRUPS in a timely manner.
Let’s hope that the regulators do the right thing, but if they do not, let’s be prepared to mount an all-out offensive to remedy this situation. At least this time we can deal with this issue well in advance of December. It may be déjà vu all over again, but at least we can avoid ruining another Christmas!
– S. Joe DeHaven