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1. Introduction

In June 2012, the Federal Reserve, the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation, proposed new rules for US banking organizations to implement Basel III. 1 These rules provided for, among other things, heightened regulatory ratios that increased the amount of Tier 1 capital banking organizations must carry relative to certain measures of their assets. 2 In addition, the rules—finalized in July 2013 3 —narrowed the types of instruments that qualify as Tier 1 capital, excluding new issuances of both trust preferred securities (TruPS) and cumulative perpetual preferred stock. 4 Regulators gave US banking organizations varying transition periods to come into compliance. 5

To comply with the July 2013 rules—and some additional rules that have been promulgated since 6 —large US banking organizations have had to raise large amounts of additional Tier 1 capital over the last four years. The primary way large US banking organizations—which are typically structured as bank holding companies 7 —have done this is by issuing non-cumulative perpetual preferred stock sold through bank depositary share (BDS) offerings. 8 Indeed, all eight Global Systemically Important Banks (G-SIBs) in the USA have conducted BDS offerings, raising over $65 billion in Tier 1 capital since the beginning of 2012. 9 As of the end of 2014, capital from these offerings represented roughly 67 per cent of G-SIB’s additional Tier 1 capital, and this percentage can be expected to increase as non-qualifying instruments continue to be phased out. 10

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