On March 17, the FDIC, Federal Reserve, and OCC issued a joint release encouraging banks to “use their capital and liquidity buffers as they respond to the challenges presented by the effects of the coronavirus.” 

The joint statement noted that, since the financial crisis of 2007-2008, banks have built up their capital and liquidity levels to exceed regulatory minimums and buffers, even as regulatory agencies significantly increased quantity and quality requirements. “These capital and liquidity buffers were designed to provide banking organizations with the means to support the economy in adverse situations and allow banking organizations to continue to serve households and businesses,” the statement continued. 

Finally, the agencies’ statement expressed support for banks that choose to use their capital and liquidity buffers to “lend and undertake other supportive actions in a safe and sound manner.” 

The statement applies to all institutions with under $1 billion in assets. 

In tandem with the joint statement, the agencies also released an interim final rule and request for comment revising the definition of eligible retained income in their capital rules, which directly affect the amount of capital a bank may distribute if it falls below its capital buffer. The revised definition of eligible retained income will make any automatic limitations on capital distributions that could apply under the agencies’ capital rules more gradual. 

Highlights of the interim final rule are: 

  • The interim final rule revises 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) the average of a banking organization's net income over the preceding four quarters. 
  • The revised definition of eligible retained income is intended to strengthen the incentives for banking organizations to use their capital buffers as intended in adverse conditions and serve as a financial intermediary and source of credit to the economy. 
  • This revision would reduce the likelihood that a banking organization is suddenly subject to abrupt and restrictive distribution limitations in a scenario of lower than expected capital levels. Such a scenario may occur due to the economic disruption caused by COVID-19. 
  • The revised definition would assist in the ability of S-corporation banks to provide dividends to shareholders in order to meet their pass-through tax liabilities. S-corporation banks should refer to FIL-40-2014 for additional guidance. 

Further Clarification 

On March 19, the agencies released further information in a more detailed Q&A document in response to banker questions. The document addresses five key questions: 

  1. Could the agencies clarify the meaning of a “liquidity buffer” and provide further information on how a banking organization is allowed to use such a buffer in times of stress? 
  2. Could the agencies provide clarity on the purpose of the 90-day draws on the discount window and whether prepayment would impact the maturity of the loan for LCR purposes? 
  3. Could the agencies clarify the meaning of a “capital buffer,” and the meaning of regulatory minimums and provide further information on how a banking organization is allowed to use such a buffer in times of stress? 
  4. How does the statement on buffer usability interact with triggers included in a recovery plan or a resolution plan? 
  5. Could the Board confirm whether the statement related to Use of Capital and Liquidity Buffers applies to total loss-absorbing capacity and long-term debt requirements? 

Read the full Q&A document here.