Mea Culpa. Not too long ago I wrote an item about Warren Buffett's deal to invest $5 billion in Bank of America via preferred shares. I erroneously stated that, as cumulative perpetual preferred shares, the proceeds count toward Tier 1 capital (albeit on a restricted basis). That is not the case.

The statement would have been true not so long ago, but in my haste I neglected the new capital requirements and definitions set forth by Basel III, which were released in September 2010. Under the new guidelines, several asset classes, such as cumulative perpetual preferred shares and trust preferred shares, will no longer count toward Tier 1 capital.

To be sure, cumulative perpetual preferred could be legally counted as part of Tier 1 capital for a bit longer, as the rules provide a 10-year phase out period. However, for large banks, the phase-out period has been accelerated. Under the Collins Amendment, which is a provision of Dodd-Frank, both trust preferred hybrid securities and cumulative perpetual preferred stock will be phased out of bank holding companies with assets of $15 billion or more between January 1, 2013 and January 1, 2016.

So the conservative approach here would be to not count cumulative perpetual preferred shares toward Tier 1 Capital. In any case, I should have refined the point at the time.

Related articles:
Basel committee issues new capital rules  
Buffett invests $5 billion in Bank of America  
More on the likelihood of a capital raise at Bank of America