Under the deal, bank holding companies with less than $15 billion of assets will continue counting existing trust-preferred securities as Tier 1 capital, a key measure of a bank's strength. Larger banks will have five years to phase out their treatment of the hybrid securities as Tier 1 capital.
As they do so, these larger banks will likely be forced to raise billions in additional capital to make up for the loss of the trust-preferred securities.
The deal is a win for Senate Banking Committee Chairman Christopher Dodd, who needed to protect the capital standards provision in order to keep its author, Sen. Susan Collins (R., Maine), on board with the broader bill.
House lawmakers had pressed to grandfather all trust-preferred securities, regardless of a bank's size, which Mr. Dodd opposed after consulting Ms. Collins. Then the House side tried to give larger banks up to 10 years to phase in the new rules, but Mr. Dodd rejected that as well.
The $15 billion threshold to grandfather smaller banks was a concession designed to keep another key supporter happy: Sen. Blanche Lincoln (D., Ark.).
Ms. Lincoln pushed her Senate colleagues to raise the grandfather threshold to $15 billion from $10 billion. The move would benefit a bank in her home state, Arvest Bank Group Inc., of Bentonville, which is owned by the Walton family of Wal-Mart Stores Inc. Arvest could have been forced to raise about $115 million more for its capital cushion without the protection of the grandfather clause.
Meanwhile, the top House negotiator vowed that lawmakers would finish their work Thursday despite doubts from leadership and aides that such a deadline is achievable.
"We believe we can finish. A lot of progress is being made," said House Financial Services Chairman Barney Frank (D., Mass.), who is leading the House negotiators on the conference committee tasked with finalizing the sweeping legislation.
Mr. Frank said negotiators would delay consideration of the derivatives title of the bill, one of the biggest issues the panel must bridge, until after they "dispose of" the so-called Volcker rule, a provision that seeks to ban most banks from using their own capital to make market bets.
The two issues are closely linked, and the Senate is close to sending House negotiators an offer on the Volcker rule, Mr. Frank said. Many policymakers have suggested a stronger version of the Volcker rule could be added to the bill in exchange for stripping out a controversial derivatives measure that would force banks to spin off their swaps desks.
But Ms. Lincoln, the sponsor of the spin-off measure, has so far resisted efforts to take out the provision.