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US banks take advantage of capital rules


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As is being discussed in a couple of the bank threads, the historic lows in loans/deposits is an historic opportunity to redeem high cost liabilities. A all large banks are taking advantage of it, especially when the new capital regulations help.





US lenders have around $120bn of outstanding trust preferred securities, or Trups, which count as tier one capital under current rules, because banks can defer interest payments if they are struggling for cash.


The securities contain a standard clause that allows banks to repay them early if their status under capital rules were to change. Many banks are arguing that the Federal Reserve’s capital proposals earlier this month represented such a change, and lenders including Citigroup and JPMorgan have since said they will recall almost $16bn of the securities.


Many Trups pay generous coupons because they were issued in the run-up to the financial crisis, when interest rates were much higher. Citigroup has almost $10bn of outstanding Trups with coupons that pay more than 7 per cent, while JPMorgan has almost $15bn of Trups that pay more than 6 per cent, according to Barclays research.


JPMorgan analysts estimate that $30bn of Trups have a coupon above 6.25 per cent and could be subject to early redemption. Retiring them could save banks around $2bn in annual interest payments, assuming an average interest rate of around 6.5 per cent.



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