Bank Capital Buffer Requirements Relaxed in Response to Coronavirus

March 18, 2020

In response to the COVID-19, coronavirus, outbreak and related economic distress, banking agencies are encouraging banks to use their resources to support the community through lending and have also issued an interim final rule relaxing capital requirements.  Revised definitions of eligible retained income and potential limitations will be more gradual, allowing banks to provide needed lending support to the community and owner distributions while potentially dropping below capital buffer requirements.

FDIC supervised institutions must maintain minimum capital requirements.  If these levels are not sustained, the institution may be deemed to be engaging in unsafe and unsound practices and face FDIC scrutiny and corrective actions.

In addition, institutions must maintain a capital conservation buffer which is designed to strengthen institutions during potentially stressful economic cycles.  If a capital conservation buffer is not maintained within prescribed requirements, discretionary and capital distribution payouts, such as dividends and bonus payments, may be limited.

However, regulatory agencies are concerned the buffer requirements don’t limit capital distributions gradually, as intended, and may cause undue burden.  The notice will allow banks to continue lending in these stressful times without adversely affecting distributions owners may also need.

S corporation banks pass income and loss through to their shareholders, increasing or decreasing shareholder taxable income. When an S corporation has income but does not pay dividends, its shareholders must pay the related tax from their own resources.  The interim final rule should help institutions make distributions many owners use to pay taxes, even when required ratios and capital conservation buffers fall.

The agencies encourage institutions to make prudent distribution decisions and remind that this interim final rule doesn’t change other rules or regulations limiting capital distributions or discretionary bonuses.

Questions or Concerns?  Eide Bailly’s Financial Institution Services Group can help.

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