Federal banking regulators on Tuesday announced an interim final rule, issued for comment, that makes capital distribution restrictions for firms experiencing a decline in capital more gradual, the aim being to help encourage continued lending to households and businesses amid the current market disruptions due to the spread of the coronavirus.
“The agencies support banking organizations that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner,” according to a statement issued jointly by the Federal Reserve Board, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC). The agencies added that they expect banking organizations “to continue to manage their capital actions and liquidity risk prudently. “
With that statement, the agencies also issued a joint interim final rule that revises the definition of eligible retained income for all depository institutions, bank holding companies, and savings and loan holding companies subject to the agencies’ capital rule.
They said the current definition of eligible retained income, “particularly in light of present market uncertainty,” could be a deterrent to banks’ continued lending to creditworthy businesses and households. They are therefore revising the definition of eligible retained income to the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) average of a banking organization’s net income over the preceding four quarters.
“This definition will apply with respect to all of a banking organization’s buffer requirements, including the fixed 2.5% capital conservation buffer, and, if applicable, the countercyclical capital buffer, the GSIB [global systemically important bank] surcharge, and enhanced supplementary leverage ratio standards,” the interim rule notice states. This definition will also also apply to all parts of a covered holding company’s buffer requirements, it notes, including the stress loss portion of a covered holding company’s capital conservation requirement, once the stress capital buffer (SCB) final rule adopted March 4 is effective.
“The agencies believe that having one definition for all banking organizations as part of this interim final rule simplifies the regulatory capital framework and ensures fairness across banking organizations of all sizes,” it states.
The interim final rule takes effect upon publication in the Federal Register, scheduled Thursday (March 19). Comments are due 45 days following publication in the Register.