SEPTEMBER 8, 2010
The Dodd-Frank Act implementation of the Collins Amendment
By: Raymond Gustini and Lloyd H. Spencer
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), signed into
law by President Obama on July 21, 2010, is historic legislation to reform the nation’s financial
regulatory system. During the lengthy Senate floor debate on the Dodd-Frank Act, a number of
favorable amendments were added to the bill—increased federal deposit insurance limits, interest on
business checking, and relief from Section 404(b) of Sarbanes Oxley for companies under $75 million
in market capitalization. However, other amendments were added during floor debate—the
interchange fee for debit cards and changes to rating agency selection requirements—that stirred
controversy.
In all likelihood, no single amendment has generated as much controversy as a provision aimed at
equalizing consolidated capital requirements for bank and savings and loan holding companies to
minimum ratios established under the prompt corrective action rules. When initially proposed by its
sponsor, Senator Susan Collins (R-ME), it was ostensibly for the purpose of equalizing large bank
and small bank holding company Tier 1 capital. However, after the amendment became part of the
Senate passed bill, it was soon apparent that it did much more, including the possible elimination of
TARP-related capital from the Tier 1 calculation. House and Senate conferees made helpful changes
but its current form still poses some problems.
Regulations will help to clarify some matters, but it is clear, even as clarification is provided and
ambiguity eliminated, that the Collins Amendment will drive significant change in how capital is
accumulated. Easy capital from participation in trust preferred pools will no longer be possible for
any but the smallest companies. It is also likely that the stand-alone market for trust preferred
securities will not be available in any meaningful form. As a result, the largest companies will be
focusing on higher quality, more permanent sources of capital such as common stock.
The Collins Amendment provisions, as well as certain other provisions of the Dodd-Frank Act that
impact capital level requirements of financial institutions, are discussed in this alert.
Capital requirements of the Collins Amendment
The provisions of the Collins Amendment are contained in Section 171 of the Dodd-Frank Act.
Section 171 directs the appropriate federal banking agencies to establish minimum leverage and riskbased capital requirements, on a consolidated basis, for insured depository institutions, depository
institution holding companies, and nonbank financial companies that are supervised by the Federal
Reserve. The minimum leverage and risk-based capital requirements are to be determined based on
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the minimum ratios established by the federal banking agencies that apply to insured depository
institutions under the prompt corrective action regulations.
Basing these leverage and risk-based capital requirements on the components of capital that are used
in the prompt corrective action rules will have the effect on depository institution holding companies
of excluding trust preferred securities from Tier 1 capital. As discussed below, Section 171 contains
grandfathering and phase-in requirements on the consolidated capital treatment of trust preferred
securities issued before May 19, 2010. The term “depository institution holding company” means a
bank holding company or a savings and loan holding company (as defined in the Federal Deposit
Insurance Act) that is organized in the United States.
Investments in financial subsidiaries
Depository institution holding companies are not required to deduct from regulatory capital
investments in financial subsidiaries even though such investments are required to be deducted by
insured depository institutions when determining their regulatory capital.
Effective date
General. Section 171 of the Dodd-Frank Act will be immediately effective for all debt and equity
instruments issued on or after May 19, 2010, by depository institution holding companies and
nonbank financial companies supervised by the Federal Reserve. For debt or equity instruments
issued before May 19, 2010, any regulatory deductions required under Section 171 will be phased in
over a three-year period beginning on January 1, 2013, except as noted below.
Smaller bank holding companies. Section 171 does not apply to small bank holding companies
subject to the Small Bank Holding Company Policy Statement of the Federal Reserve, as in effect on
May 19, 2010. The Policy Statement applies to bank holding companies with assets of less than $500
million that are not engaged in significant nonbanking activities, do not conduct significant offbalance sheet activities (including securitization and asset management), and do not have a material
amount of debt or equity securities outstanding (other than trust preferred securities). Therefore,
bank holding companies subject to the Policy Statement have a statutory exemption from both the
phase-in requirements and the post-May 19, 2010, prohibition on the use of trust preferred securities
and may continue to rely on and issue new trust preferred securities as part of Tier 1 capital.
Section 171 provides an exception and also does not require any regulatory deductions for debt or
equity instruments issued before May 19, 2010, by bank holding companies that had total
consolidated assets of less than $15 billion as of December 31, 2009.
Savings and loan holding companies. Section 171 will be effective five years after the date of
enactment of the Act for depository institution holding companies that were not supervised by the
Federal Reserve as of May 19, 2010, which would include savings and loan holding companies. In
addition, Section 171 provides an exception and does not require any regulatory deductions for debt
or equity instruments issued before May 19, 2010, by (1) savings and loan holding companies that
had total consolidated assets of less than $15 billion as of December 31, 2009, and (2) organizations
that were mutual holding companies on May 19, 2010. Once Section 171 does take effect, savings
and loan holding companies, which will then be regulated by the Federal Reserve and not the Office
of Thrift Supervision, will be subject to capital requirements for the first time. It is unclear whether
the Federal Reserve Small Bank Holding Company Policy Statement will be expanded to savings and
loan holding companies with assets of less than $500 million, and therefore exempt them from
Section 171, but this will be important guidance to be developed by the federal banking agencies.
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TARP securities. Section 171 does not apply to debt or equity instruments issued to the United
States or any agency or instrumentality thereof pursuant to the Emergency Economic Stabilization
Act of 2008 and prior to October 4, 2010. Therefore, all preferred securities issued under the TARP
program will continue to count as Tier 1 capital.
Foreign banks. The term “depository institution holding company” also includes those bank and
savings and loan holding companies that are owned by foreign organizations but does not include the
parent foreign organization. Section 171 will be effective five years after the date of enactment of the
Act for bank holding company subsidiaries of foreign banking organizations that have relied on
Supervision and Regulation Letter SR-01-1 issued by the Federal Reserve.
Capital requirements for activities that pose risks to the financial system
Subject to the recommendations of the Financial Stability Oversight Council, the federal banking
agencies will, under Section 171 of the Dodd-Frank Act, be required to develop capital requirements
applicable to all insured depository institutions, depository institution holding companies, and
nonbank financial companies that are supervised by the Federal Reserve to address risks associated
with the activities of such institutions. The risks of such activities to the institution as well as other
public and private stakeholders in the event of adverse performance, disruption, or failure of the
institution or the activity will be considered when establishing the capital requirements.
The federal banking agencies’ rules are required to address the risks arising from:

significant volumes of activity in derivatives, securitized products purchased and sold,
financial guarantees purchased and sold, securities borrowing and lending, and repurchase
agreements and reverse repurchase agreements;

concentrations in assets for which the values presented in financial reports are based on
models rather than historical cost or prices deriving from deep and liquid 2-way markets; and

concentrations in market share for any activity that would substantially disrupt financial
markets if the institution is forced to unexpectedly cease the activity.
Studies
The GAO, after consultation with the federal banking agencies, is required to conduct a study of the
access to capital by smaller depository institutions. For purposes of the study, a smaller depository
institution means an insured depository institution with total consolidated assets of $5 billion or less.
The report, together with any recommendations for legislative or regulatory action that would
enhance access to capital by smaller insured depository institutions, must be submitted to Congress
within 18 months of the date of enactment of the Act.
The GAO is also directed to consult with the federal banking agencies and conduct a study of the use
of hybrid capital instruments as a component of Tier 1 capital for banking institutions and bank
holding companies. The study must consider, among other things, the current use of hybrid capital
instruments such as trust preferred securities as a component of Tier 1 capital, whether
disqualification of trust preferred securities could lead to failure or undercapitalization of existing
banking organizations, and the availability of capital for financial institutions with less than $10
billion in total assets. The report must be submitted to Congress within 18 months of the date of
enactment of the Act.
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The GAO, in consultation with the Secretary of the Treasury and the federal banking agencies, is
directed to conduct a study of the capital requirements applicable to U.S. intermediate holding
companies of foreign banks that are bank holding companies or savings and loan holding companies.
Other capital requirement provisions of the Act
Countercyclical capital rules. The Dodd-Frank Act instructs the appropriate federal banking
agencies to make the capital requirements for bank and savings and loan holding companies and
insured depository institutions countercyclical so that the amount of capital required to be
maintained increases in times of economic expansion and decreases in times of economic
contraction, consistent with safety and soundness.
Volcker Rule. The so-called “Volcker Rule” provision prohibits, subject to certain exceptions, any
equity, partnership, or other ownership interest in or sponsorship of a hedge fund or private equity
fund by a banking entity. This prohibition will be implemented over a period of several years. The
federal banking agencies are required to issue rules that impose additional capital requirements on
banking entities that have such investments during the implementation period.
The Volcker Rule permits certain activities, for example investments designed primarily to promote
public welfare, of banking entities. The appropriate bank regulatory agencies are required to issue
rules that impose additional capital requirements and quantitative limitations, including diversification
requirements, regarding such permitted activities under the Volcker Rule if the agencies determine
such requirements are appropriate to protect the safety and soundness of the banking entities
engaged in such activities.
For further information, please contact your Nixon Peabody attorney or:

Raymond Gustini, (202) 585-8725, or rgustini@nixonpeabody.com

Lloyd H. Spencer, (202) 585-8303 or lspencer@nixonpeabody.com
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