The Dodd-Frank financial reform bill has opened a 90-day window for banks to buy back $118bn in high-cost securities, a move that would enable them to replace the instruments with cheaper capital but is likely to cause tensions with regulators and investors.
Wall Street executives and lawyers say several banks are considering redeeming “trust preferred securities” (Trups) – a hybrid of debt and equity – by taking advantage of a clause triggered by the new rules.
Trups – equity instruments that pay interest like bonds – became popular in the financial crisis when banks sold more than $40bn-worth to investors ranging from Warren Buffett to small savers. Financial groups are interested in buying back the securities because Trups are an expensive form of capital. Banks needed to offer high interest rates to entice investors.