Supervisory Guidance For Large Bank Holding Companies: Federal Reserve Issues New Supervisory Guidance for Large Bank Holding Companies Regarding Capital Plans, Second Round of Stress Tests, Dividend Payments and Other Capital Distributions

Sullivan & Cromwell LLP - November 22, 2010

On November 17, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued new supervisory capital guidance applicable to the 19 bank holding companies (”SCAP BHCs”) that participated in the 2009 Supervisory Capital Assessment Program (“SCAP”), generally referred to as the “stress test”.  The new guidance covers:

  • capital plans;
  • a second round of stress tests; and
  • dividends and other capital distributions (including their relationship to Basel III).

The new guidance requires each SCAP BHC to submit a “comprehensive capital plan” to the Federal Reserve and its primary federal bank regulator by January 7, 2011, regardless of whether the SCAP BHC proposes to increase dividends or undertake any other capital distributions.  In connection with its capital plan, each SCAP BHC is required to conduct a new stress test under a set of detailed requirements and parameters, some to be defined by the SCAP BHC itself and others to be provided by the Federal Reserve.  Capital plans that include a request to increase common stock dividends, implement common stock repurchase programs or redeem or repurchase capital instruments (“capital distributions”) will be evaluated under a set of special considerations that appear designed to influence future bank capital actions in important respects.

SCAP BHCs are instructed to consult with Federal Reserve staff before taking any action that could result in a “diminished capital base”, including increasing dividends or other capital distributions.

With respect to the amount of potentially permitted dividend payments, the new guidance provides that dividend payout ratios exceeding 30% of the SCAP BHC’s after-tax net income “will receive particularly close scrutiny.”

Capital plans submitted by the January 7, 2011, deadline should generally elicit a supervisory response no later than March 21.  The Federal Reserve may advise a SCAP BHC to revise and resubmit its capital plan during a subsequent calendar quarter.