April 16, 2009Hon. Timothy F. GeithnerSecretary of the TreasuryUnited States Department of the Treasury1500 Pennsylvania Avenue, NW, Room 3330Washington, DC 20220Dear Secretary Geithner:I am writing on behalf of the American Bankers Association to requestthat Treasury address two serious inequities that have developed in theimplementation of the Capital Purchase Program (CPP).
Inequitable tier 2 capital treatment under CPP
We would appreciate you addressing the inequitable capital treatment of the Treasury investments for certain banks participating in the CPP. For allcompanies other than stand-alone insured depository institutions organized as Scorporations (S corporation banks) or mutual institutions (mutual banks), theinvestments are treated as Tier 1 capital; however, for S corporation banks andmutual banks the investments are treated as Tier 2 capital. We reiterate ourconcerns, first expressed when the term sheet for S corporations was released,about the inequitable treatment of certain classes of institutions. While Tier 2capital improves an institution’s total risk-based capital, it does nothing to helpother measures of an institution’s capital position that often are scrutinized moreclosely by investors, analysts, and bank customers.We appreciate that there are differences between the capital instrumentsprovided by the various types of entities that are participating in the CPP.However, the investments are designed to be economically comparable. Each hasa stated duration that likely will far exceed the actual life of Treasury’sinvestment in any given institution. Each has incentives for the recipient to repayTreasury by the end of the 5
year. Each pays dividends or interest in an amountthat, after taxes, is designed to be comparable. And each has comparablerestrictions that apply to the recipient as long as Treasury’s investment remainsoutstanding. Given these similarities, it is unfair to single out S corporation banksand mutual banks for a different treatment. Accordingly, we urge you to work with the bank regulators to achieve consistent treatment of Treasury’s CPPinvestments as Tier 1 capital for any company that participates in the program.
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