Trups: small favours - FT.com Bigger can be better, but sometimes it pays to be small. Balance sheet-challenged US banks got a break or two when the Federal Reserve last week ruled on capital requirements under Basel III. For example, banks with less than $15bn in assets or those set up as mutuals will be able to keep treating some existing debt-equity hybrid instruments, including trust preferred securities (Trups), as tier one capital. The Fed is allowing Trups issued before May 2010 to roll off rather than requiring replacement with qualifying capital sooner. Generally, Trups are not considered to be sufficiently loss-absorbing to count as tier one capital. For starters, their dividends are cumulative. Even if a bank suspends the payment, it is still owed for a period of time. Ahead of the financial crisis, Trups issued by small banks were pooled into securities, which further complicated their use as buffers. The rationale for the concessions is that it is more expensive for small banks to issue replacement capital, such as non-cumulative perpetual preferred securities. Investors would demand premiums for their smaller and more illiquid issuance. That is the reason they were pooled in the first place. And that cost could affect the banks" capacity as local lenders. Perhaps it is also a nod to the idea that small banks pose less systemic risk. While most large banks have already replaced their Trups, some 44 per cent of the small and midsized banks tracked by KBW have Trups that are 1.5 per cent of their risk-weighted assets or higher. Nearly 60 per cent are at 1 per cent or higher. The Trups will go away - they are not perpetual. Small banks are just getting more time to transform their capital structure during which they can avoid issuing expensive non-common stock alternatives or having to hold more common. A lower cost of capital in the near term would be a good thing for shareholders. But it still means less of a capital cushion.