Unlike fee income business and deposits, loans initially cost more money to originate than what they can generate. Put a loan on your bank’s books, and you need to pay for a whole litany of upfront costs such as sales expense, underwriting, and administration, plus allocate a certain amount of capital into a risk reserve. On the other side of the accounting equation, revenue comes in over the course of the year in the form of fees and interest payments.
For U.S. banks, unlike common equity that derives its returns primarily through appreciation; preferred equity gives an investor a return largely in the form of a fixed dividend. Thus, when it comes to valuing a bank with preferred debt, the question comes up do you treat the capital as common or more like a debt instrument? Because the dividend is largely like a coupon on a holding company loan or other debt instrument, it seems natural to value preferred equity as debt.