FDIC Gives Guidance to S-Corporation Banks Regarding Dividends under Basel III

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On July 21, the FDIC clarified how it will evaluate requests by S-Corporation Banks to make dividend payments that would otherwise be prohibited under the Basel III capital conservation buffer. New Basel III capital rules include a capital conservation buffer which prohibits or limits the dividends a bank can pay when its risk-based capital ratios fall below certain thresholds. If an S-corporation bank has income but is limited from paying dividends as a result of the new rules, its shareholders may have to pay taxes on their pass-through share of the S-corporation’s income from their own resources. To avoid this problem, a bank may request approval from their primary federal regulator to make a dividend payment that would not otherwise be permitted. Absent serious safety-and-soundness concerns about the requesting bank, the FDIC generally would expect to approve such 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. Press Release. Financial Institution Letters.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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