FDIC issues guidance to S-Corporation banks regarding Basel III dividend limitations

On July 21, 2014, the Federal Deposit Insurance Corporation (FDIC) issued Financial Institution Letter FIL-40-2014. The guidance clarifies how the FDIC will evaluate requests by S-Corporation banks to make shareholder dividend payments to cover taxes on their pass-through share of the bank's earnings. Without FDIC approval, these dividends would not be permitted under the capital conservation buffer requirements in the Basel III rule.

The FDIC finalized new Basel III capital rules on April 8, 2014. These rules include a capital conservation buffer which prohibits or limits the amount of dividends a bank can pay when its risk-based capital ratios fall below certain thresholds. The capital conservation buffer will be phased in during the years 2016-2018 and will be fully effective in 2019.

The Basel III rule contains a provision allowing any bank to request approval from their primary federal regulator to make a dividend payment that would not otherwise be permitted. The regulator may approve such request if warranted based on safety-and-soundness considerations. Under FIL-40-2014, absent significant safety-and-soundness concerns about the requesting bank, the FDIC generally would expect to approve well-rated S-corporation banks exception requests that are limited to the payment of dividends to cover shareholders' taxes on their portion of an S-corporation's earnings.

For more information on the rule, view the FDIC press release >

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