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ICBA Commends Federal Reserve's Trust Preferred Proposal

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Washington, D.C. (July 13, 2004) - The Independent Community Bankers of America (ICBA) commended the Federal Reserve for its proposal to retain trust preferred securities as an element of Tier 1 capital for bank holding companies, albeit with stricter quantitative limits and standards.

"The issuance of trust preferred securities is often the only reasonable way a community bank can access the capital markets," said Karen Thomas, ICBA executive vice president. "A change in the treatment of trust preferred securities as Tier 1 capital would have meant a curtailment of expansion and lending activities, with less service to customers and communities."

While ICBA generally supports the proposal to limit "restricted core capital elements" to 25% of "core capital elements," ICBA expressed concern in a comment letter to the Federal Reserve that the deduction of goodwill from the calculation of the 25% limit will adversely impact those bank holding companies that have accumulated significant amounts of goodwill. ICBA urged the Federal Reserve to adopt a longer transition period-five years rather than three-to allow those bank holding companies that have been active acquirers of bank and branches a chance to comply with the new restriction.

ICBA also expressed concern that small bank holding companies with significant amounts of debt or goodwill could be adversely impacted if the Federal Reserve were to change its policy and require that subordinated debt associated with trust preferred securities be included as debt for purposes of the Small Bank Holding Company Policy Statement. ICBA recommended that before considering any change to the treatment of trust preferred securities issued by small bank holding companies, the Federal Reserve first analyze the impact of the change on small bank holding companies and seek additional comment, through a rulemaking procedure, on specific approaches.

ICBA also urged the Federal Reserve to increase the size limit to $500 million for bank holding companies that qualify under the Small Bank Holding Company Policy Statement. ICBA noted that raising the limit, which has been $150 million since 1972, would enhance the ability of community banks to remain independent.

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