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Regulatory
Update
The FDIC issued guidance in Financial Institution Letter
(“FIL”) 40-2014 clarifying how it will evaluate requests
by S-corporation banks to make dividend payments
that would otherwise be prohibited under the Basel III
capital conversation buffer. The issue at hand, which is
unique to S-corporation banks, was a point of focus dur-
ing the comment period of Basel III because dividend
payout restrictions may result in a shareholder being re-
sponsible for tax payments on taxable income without
receiving a cash distribution from the S-corporation to
make the tax payment. Many S corporation sharehold-
ers rely on distributions from the corporation to satisfy
this tax liability.
The capital conservation buffer limits the amount
of payouts a bank can make when capital ratios fall
below the buffer. The buffer will be phased-in over three
years beginning in 2016 and fully phased-in by 2019.
A bank’s capital conservation buffer is the smallest of
the following ratios: Common equity tier 1 capital ratio
minus 4.5 percent, Tier 1 capital ratio minus 6 percent,
or Total capital ratio minus 8 percent. Payout restrictions
are tiered based on an institution’s capital conservation
buffer as detailed in the FIL. Types of payments that are
restricted if a bank does not satisfy the capital con-
servation buffer requirement include dividends, share
buybacks, discretionary payments on Tier 1 instruments,
and discretionary bonus payments.
As described in more detail in the FIL, “absent
significant safety-and-soundness concerns about the
requesting bank, the FDIC generally would expect
to approve the exception requests by well-rated S-
corporation banks that are limited to the payment of
dividends to cover shareholders’ taxes on their portion
of an S-corporation’s earnings.” Significant safety-and-
soundness concerns include “an ongoing examina-
tion with adverse trends identified, a pending written
directive or downgrade to a less than satisfactory status,
or a case where the buffer is triggered by an aggressive
growth strategy”.
The FDIC will provide instructions on how to request
an exception well in advance of when the buffer comes
into effect.
To discuss this matter further please contact your
account representative.
Dan Stimpson, Strategic Solutions
FDIC Issues Basel III Guidance to S-Corporation
Banks on Dividends to Satisfy Shareholder Tax Liability
November 3-5, 2014
Memphis, Tennessee
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