Given the tremendous volume of comments from industry participants regarding the Basel III capital rules and the mounting political pressure regarding adoption of the rules, many industry observers had speculated that the Federal Reserve, FDIC, and OCC would be challenged to adopt the final rules before January 1, 2013 (the date established for effectiveness of portions of the rule in the release of the proposed rules). On November 9, 2012, the agencies announced that they indeed will not be able to meet that deadline. This announcement runs contrary to the recently renewed directive by the Basel Committee on Banking Supervision for all members of the committee to adopt final rules prior to January 1, 2013. However, we believe it is appropriate for the U.S. regulatory agencies to carefully consider the impact of the rules on the U.S. banking system, particularly in light of our unique community banking system, and support the agencies delay in adopting the rules.
It is our understanding that the regulatory agencies are working through the comment letters submitted to them and are well aware of the concerns of community bankers, including the inclusion of unrealized gains and losses in the available-for-sale securities portfolio in Common Equity Tier 1 capital and the changes in risk-weighting for mortgage loans. We will continue to carefully monitor the progress of the rulemaking process as the agencies consider the impacts of the Basel III rules on the industry.
On August 8, 2012, the banking regulators (Federal Reserve, OCC, and FDIC) extended the comment period on the three notices of proposed rulemaking that implement the Basel III capital standards and revised risk-weighting rules. Many organizations representing community banks had requested more time for community banks to analyze the impact of those proposed rules on their operations, and the regulatory agencies have responded to those requests.
The deadline for submitting comments is now October 22, 2012 (comments had been due on September 7, 2012). We recommend that community banks carefully analyze the impact of the proposals on their balance sheets and business plans and submit comments as appropriate. These comments are key in the effort to effect change in the final rules. We have heard from many bankers that they are concerned about the new rules’ impact on a wide variety of facets of their banks, including mortgage lending, real estate lending, and the structure of their securities portfolios.
Please contact any member of the Bryan Cave financial institutions team if you would like to discuss the impact of the rules on your bank or if you need help drafting your comment letter.
As the industry gains a greater understanding of the proposed Basel III capital rules, some management teams are identifying potential problems for their organizations in the rules. One such problem is the broad-based dividend restrictions and the consideration of how those restrictions may impact S Corporations.
Many states recognize in their banking laws and regulations that a different set of standards should apply in determining dividend restrictions for S Corporation banking institutions and their holding companies. Because the taxable income of these entities is passed through to the shareholders of the organization, it is expected that these entities will pay distributions that allow their shareholders to fund their personal tax liabilities attributable to the taxable income of the organization.
The proposed Basel III capital rules have a number of dividend restrictions. Most bankers are familiar with the dividend restrictions imposed under Prompt Corrective Action, but the new capital rules also contain dividend restrictions if the organization is not in full compliance with the requirement to maintain the required capital conservation buffer: a requirement for banking organizations to maintain common equity Tier 1 capital equal of 2.5% of total risk-weighted assets in addition to the minimum risk-based capital requirements.
If a banking organization does not maintain the full capital conservation buffer, it becomes subject to restrictions on the payment of dividends and on payments of discretionary bonuses to executive officers. These restrictions increase as the organization’s capital conservation buffer decreases, and if the organization does not maintain a capital conservation buffer of at least 1.25% of risk-weighted assets, it will be able to pay dividends of no more than 20% of its eligible retained income in dividends, subject to receiving a waiver of these restrictions from its regulators. Eligible retained income is defined as the organization’s net income for the previous four quarters, net of dividends and discretionary bonus payments to executive officers during that period.