§ 1211 Bank Capital Notes Issuance

This law lets a bank issue special debt called capital notes or debentures and sets rules for how those debts are paid back if the bank is liquidated, making sure depositors and other creditors are paid first.

Key Takeaways

•A bank can issue capital notes or debentures if its board approves.
•In liquidation, depositors and other creditors are paid before any capital note holders.
•Capital note holders are paid only after all depositors and creditors are fully repaid, and only if the total equity plus remaining notes equals the original amount.

Example

A bank issues $10 million of capital notes and later has to liquidate. The bank must first pay all depositors and other creditors in full, then can use any leftover money to pay the note holders.

When the bank is shut down, the law requires that every depositor and regular creditor gets paid back completely before any money goes to the people who hold the capital notes or debentures. Only after those debts are settled can the note holders receive the remaining cash, and they must be paid the full unpaid amount plus any accrued interest before any money is distributed to the bank's shareholders.

How to Calculate

Outstanding shareholders' equity + outstanding capital notes/debentures must equal the original aggregate amount at the time of issuance

Record the original aggregate amount of shareholders' equity and capital notes when they were first issued.
After any principal payment on the capital notes, add the current shareholders' equity to the remaining outstanding capital notes.
Compare this sum to the original aggregate amount; it must be exactly equal for the payment to be allowed.

Original issuance: $50 million total (equity $30M + capital notes $20M). After some principal repayment, equity is $28M and remaining capital notes are $22M.

Result: 28,000,000 + 22,000,000 = 50,000,000, which matches the original aggregate, so the payment condition is satisfied.

A bank at any time may, with the approval of its board, issue, sell or hypothecate its capital notes or debentures which may be payable upon such terms and may bear such rate of interest, if any, as may be provided therein or which may be convertible into shares. Such capital notes and debentures shall be subordinate to the claims of creditors and depositors and it shall be provided in any such capital notes or debentures that in the event of liquidation all depositors and other creditors of the bank shall be entitled to be paid in full with such interest as may be provided by law before any payment shall be made on account of principal of or interest on such capital notes or debentures and it may be provided in any such capital notes or debentures that after payment in full of all sums owing to such depositors and creditors the holders of such capital notes or debentures shall be entitled to be paid from the remaining assets of the bank the unpaid principal amount of the capital notes or debentures plus accrued and unpaid interest thereon before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any shares of the bank. It shall be provided in such capital notes or debentures that no payment shall at any time be made on account of the principal thereof, unless following such payment the aggregate of the shareholders’ equity and capital notes or debentures thereafter outstanding shall be the equal of such aggregate at the date of the original issue of such capital notes or debentures, or as may be otherwise authorized by the commissioner. (Added by Stats. 2011, Ch. 243, Sec. 3. (SB 664) Effective January 1, 2012.)

Key Takeaways

•A bank can issue capital notes or debentures if its board approves.
•In liquidation, depositors and other creditors are paid before any capital note holders.
•Capital note holders are paid only after all depositors and creditors are fully repaid, and only if the total equity plus remaining notes equals the original amount.

Example

A bank issues $10 million of capital notes and later has to liquidate. The bank must first pay all depositors and other creditors in full, then can use any leftover money to pay the note holders.

How to Calculate

Outstanding shareholders' equity + outstanding capital notes/debentures must equal the original aggregate amount at the time of issuance

Record the original aggregate amount of shareholders' equity and capital notes when they were first issued.
After any principal payment on the capital notes, add the current shareholders' equity to the remaining outstanding capital notes.
Compare this sum to the original aggregate amount; it must be exactly equal for the payment to be allowed.

Original issuance: $50 million total (equity $30M + capital notes $20M). After some principal repayment, equity is $28M and remaining capital notes are $22M.

Result: 28,000,000 + 22,000,000 = 50,000,000, which matches the original aggregate, so the payment condition is satisfied.

Key Takeaways

Example

How to Calculate

Key Terms

References

§ 1211 Bank Capital Notes Issuance

Key Takeaways

Example

How to Calculate

Key Terms

References

Key Takeaways

Example

How to Calculate

Key Terms

Related Statutes

References

Key Takeaways

Example

How to Calculate

Key Terms

Related Statutes

References