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

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 earningsPress ReleaseFinancial Institution Letters.