Citicorp Case
1. What is the difference between primary and secondary capital. How is relevant to this case?
Primary capital consists of common stock, perpetual preferred stock, surplus, undivided profits, mandatory convertible instruments (debt that must be convertible into stock or repaid with proceeds from the sale of equity), reserves from loan losses, and other capital reserves. These items are treated as permanent forms of capital because they are not subject to redemption or retirement.
Secondary capital consists of nonpermanent forms of equity, included limited-life, preferred stock and subordinated notes and debentures.
It is relevant this case because Glass-Steagall did not prevent commercial banks from engaging in securities activities overseas. By the mid 1980s, US commercial banks such as Chase Manhattan, Citicorp and JP Morgan had thriving overseas securities operations. Currencies were not securities under the Glass-Steagall Act, but since exchange rates were allowed to float in the early 1970s, they have entailed similar market risk. In 1933, futures markets were small and transacted primarily in agricultural products, so they were not included in the legal definition of securities. By the mid-1980s, US commercial banks were subject to primary capital requirements set by the SEC, OCC and FDIC while US securities firms were subject to the SEC's Uniform Net Capital Rule (UNCR). The primary purpose of capital requirements for securities firms was to protect clients who might have funds or securities on deposit with a firm. Securities firms mostly took market risk.
2. Why do many country central banks count perpetual debt as primary capital?
Most Central Banks count perpetual debt as primary capital because it loo ...