Complete Story
07/22/2014
FDIC Issues S-Corp Guidance on Basel III Capital Buffer
| The FDIC issued guidance to help relieve many community banks structured as Subchapter S corporations from rules that would limit their ability to raise capital. The guidance encourages community banks to request case-by-case exceptions to the Basel III capital conservation buffer, which curtails capital distributions, such as shareholder dividends, when regulatory capital levels fall below preset thresholds. The Basel III capital rules include a capital conservation buffer that prohibits or limits the amount of dividends banks can pay when their risk-based capital ratios fall below certain thresholds. Because income taxes are paid directly by S-corp shareholders, situations could arise in which shareholders have a material income tax obligation on taxable income earned by their bank but the bank is unable to pay enough dividends to meet the shareholders’ tax obligation. The FDIC’s guidance establishes criteria under which S-corp banks would be deemed to qualify for an exception from the buffer, such as highly rated institutions and those with sufficient capital to pay out dividends. The agency said that absent significant safety-and-soundness concerns about the requesting bank, it generally would expect to approve exception requests by well-rated S-corp banks that are limited to the payment of dividends to cover shareholders' taxes on their portion of an S-corporation's earnings. In a February letter to the federal banking agencies, ICBA raised concerns about the impact of the buffer on S-corps. The association said the capital conservation buffer would limit the ability of many S-corp community banks to raise capital and serve their communities. In its letter and in meetings with agency staff, ICBA asked regulators to allow community banks to distribute at least 35 percent of their reported net income for a reporting period. While the FDIC guidance does not provide a total exemption from the capital conservation buffer, ICBA appreciates the FDIC’s attention to S-corp community bank concerns. |
