US banks take advantage of capital rules Large US banks are taking advantage of the Federal Reserve's proposed new rules on bank capital to retire billions of dollars of high interest debt securities. 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. JPMorgan alone will save $642m a year in interest payments, according to CreditSights analysts. That could provide some relief to pressures on net interest margins, the difference between the interest rate at which banks borrow and lend, which is a measure of profitability closely watched by investors. "Some banks could see a modest benefit to NIMs in what is otherwise a challenging interest rate environment," said Jason Goldberg, US banks analyst at Barclays. But the recall of Trups securities will be a blow to investors who hold them, forcing them to reinvest cash at much lower interest rates, or in riskier assets. The Fed proposals would require banks with more than $15bn in assets to phase out Trups from tier one capital calculations by 2016. Banks are likely to issue other securities as they look to meet the Fed's proposed new rules. One option is preferred equity - shares which rank above common equity in a bankruptcy and tend to pay dividends. Unlike Trups, preferred equity counts as tier one capital under the Fed proposals, because their dividend payments are scrapped rather than deferred when banks are under strain, providing greater relief to bank balance sheets. At $15.9bn so far this year, issuance of preferred equity in the US is running at the fastest pace since 2008, according to Dealogic. Last week Barclays analysts forecast US banks will issue $80bn of such equity within four years. While the Fed proposals are likely to unleash the biggest wave of Trups redemptions in recent years, banks including Wells Fargo and Bank of America have seized on previous post-financial crisis regulatory initiatives to redeem smaller amounts. "Some issuers took the view the enactment of Dodd-Frank in 2010 [which said Trups tier one treatment could be phased out] was enough to call the securities [but] some took the view that further action was needed to be taken before a regulatory call," said Anna Pinedo, a partner at law firm Morrison & Foerster. Additional reporting by Nicole Bullock