The FRB issued a supervisory letter (SR 09-4, the “Letter”) to bank holding companies (“BHCs”) and FRB supervisory staff concerning BHC payment of dividends, stock redemptions and stock repurchases. The FRB stated that the Letter largely reiterates longstanding FRB supervisory policies and guidance, but reflects the current deterioration in economic conditions. In the current economic environment, the FRB states, it has “heightened expectations” that BHCs will inform and consult with FRB staff sufficiently in advance of: (1) declaring and paying dividends that could raise safety and soundness concerns, e.g., dividends that exceed earnings for the period for which the dividend is being paid; (2) redeeming or repurchasing regulatory capital instruments when the BHC is experiencing financial weaknesses; or (3) redeeming or repurchasing common stock or perpetual preferred stock that results in a net reduction of these elements of capital.
The FRB noted that while the Letter is addressed to all BHCs, it is “especially relevant” for BHCs experiencing financial difficulties or receiving public funds under the Emergency Economic Stabilization Act of 2008. The Letter states that BHC recipients of such public funds should not use them to pay dividends on trust preferred securities or to repurchase or redeem debt securities.
The Letter stresses that a BHC should hold capital commensurate with its overall risk profile and that voting common stockholders’ equity should be the dominant element of a BHC’s Tier 1 capital. The Letter directs FRB supervisory staff to evaluate the comprehensiveness and effectiveness of a BHC management’s capital planning.With respect to dividends, the Letter cautions BHCs’ Boards of Directors that in declaring dividends and dividend planning, the Board should ensure that the BHC’s dividend level “is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios.” BHC boards are expected to reduce or eliminate dividends when: (a) the quantity and quality of earnings have declined; (2) the BHC is experiencing other financial problems; or (3) the macroeconomic outlook for the BHC’s primary profit centers has deteriorated.