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New Federal Reserve Guidelines On Bank Capital

by Glen Shapiro,, New York

22 November 2010

The United States Federal Reserve Board has issued temporary guidelines for evaluating proposals by large bank holding companies (BHCs) that wish to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock.

The Federal Reserve said that the criteria provide a common, conservative approach to ensure that BHCs hold adequate capital to maintain ready access to funding, continue operations, and continue to serve as credit intermediaries, even under adverse conditions.

BHCs are being told that they should consult with Federal Reserve staff before taking any actions that could result in a diminished capital base, including actions such as increasing dividends, implementing common stock repurchase programs, or redeeming or repurchasing capital instruments more broadly.

The guidelines state that any such capital distribution plan will be evaluated on the basis of a number of criteria, with particular emphasis on a stress testing framework that would confirm the BHC's ability to absorb losses over the next two years under several scenarios, including an adverse macroeconomic scenario specified by the Federal Reserve and adverse scenarios appropriate for a particular firm's business model and portfolios.

The criteria will also take account of how the BHC will meet Basel III capital requirements as they take effect in the US, in the context of the proposed capital distributions as well as any anticipated impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the firm's business model or capital adequacy; and how the firm plans to repay US government investments, if applicable.

BHCs are expected to complete the repayment or replacement of any US government investments in the form of either preferred shares or common equity prior to increasing capital payouts through higher dividends or stock buybacks.

The Federal Reserve expects to respond to capital distribution requests beginning in the first quarter of next year. It will evaluate requests for planned capital actions in the context of its broader process for assessing capital adequacy at the largest BHCs.

Therefore, as part of the regular supervisory process, the Federal Reserve is requesting that large US BHCs submit comprehensive capital plans by January 7 next year, regardless of whether a capital action is planned.

It is emphasized that the BHC’s senior management should review and approve the capital plan prior to its submission to the Federal Reserve. A BHC should update and re-submit its plan to reflect any material change in the firm’s risk profile, business strategy, or corporate structure. The Federal Reserve will monitor a BHC’s condition relative to its current capital plan, and, where the firm’s condition proves to be significantly weaker than anticipated in the plan, will expect management to take additional action to strengthen the BHC’s capital base.

The capital plan review is the latest step in the Federal Reserve's efforts to enhance supervision of banking organizations. As recognized by the Dodd-Frank Act and demonstrated by the Federal Reserve-led Supervisory Capital Assessment Programme in 2009, regular horizontal reviews across groups of firms provide regulators with both firm-specific and industry-wide perspectives of various issues and trends.

The status of these temporary guidelines will be reviewed on or before December 31, 2011, but the Federal Reserve plans to undertake capital plan reviews on a regular basis and will consult with primary federal bank regulators.

A comprehensive report in our Intelligence Report series, analysing the situation on the ground in each of the main offshore banking centres, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: business | law | banking | offshore | offshore banking | United States | dividends | regulation

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