July 22, 2014
Authored by: Jonathan Hightower
On July 21, 2014, the FDIC issued a Financial Institutions Letter (FIL) on the impact of the capital conservation buffer restrictions under Basel III on S Corporation banks. The guidance essentially states that, even though Basel III restricts an S Corporation bank’s ability to pay tax distributions if it does not maintain the full capital conservation buffer, the FDIC will generally approve requests to pay tax distributions if no significant safety and soundness are present. The succinct guidance probably raises more questions than answers. Among those questions are the following.
- Would a bank that does not meet the capital conservation buffer requirements ever really be 1 or 2 rated and experiencing no adverse trends?
- Does the FDIC believe Obamacare and the related net investment income tax will be repealed? What about state income taxes? The factor limiting the dividend request to 40% may ignore what is actually required to allow shareholders to fund their tax liabilities.
- What is an “aggressive growth strategy?” Is it the same as an intentional growth strategy?
- If your institution is a national bank, a Fed member bank, or a bank holding company with more than $500 million in consolidated assets, will the Fed and the OCC follow suit and issue similar guidance?
At the end of the analysis, the guidance is probably similar to the current capital rule stating that 1 rated institutions may have a leverage ratio as low as 3.0% and still be considered “adequately capitalized.” That rule has little practical impact in that it is awfully hard to find an institution with a 3.0% leverage ratio that is 1 rated. Similarly, we believe any institution that meets the guidelines set forth in the FIL would almost certainly have no need to make this request. Indeed, the FIL itself seems to acknowledge that fact.