under banking regulations, and may be treated as the highest quality capital (tier 1 capital) if they have certain characteristics. Since the amount of liabilities (such as deposits) that a banking institution may have is limited to some multiple of its capital, this regulatory treatment is highly favorable and is why the trust preferred structure is favored by bank holding companies. To be eligible as Tier 1 capital, such instruments must provide for a minimum five-year consecutive deferral period on distributions to preferred shareholders. In addition, the intercompany loan must be subordinated to all subordinated debt and have the longest feasible maturity. The amount of these instruments, together with other cumulative preferred stock a bank holding company may include in Tier 1 capital, may constitute up to 25 percent of the sum of all core capital elements, including cumulative perpetual preferred stock and trust preferred stock. Non-financial companies are more likely to use less complex structures, such as issuing junior subordinated debt directly to the public. Disadvantages The principal disadvantages of trust preferred securities is cost. Because the trust preferred securities are subordinated to all of the issuer's other debt and typically have features like early redemption and optional deferral of interest payments, investors demand high interest rates. These rates will be much higher than ordinary senior debt or subordinated debt. Offering costs are high as well. Investment banks will take a large underwriting fee to sell the securities to the public, and legal and accounting fees will also be high. They have also been blamed for the failure of a few banks during the recent financial crisis. Colin's amendment The Dodd-Frank Wall Street Reform and Consumer Protection Act included a provision which would "exclude trust-preferred securities from the regulatory capital of bank holding companies", although it has several exceptions intended to allow these holding companies to transition into compliance with the law, including an exception for bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009 and an exception for small bank holding companies under the Board of Governors’ Small Bank Holding Company Policy Statement. See also Debenture References External links Trust Preferred Securities - TruPS Trust-preferred security Definition Securities (finance)