Alert November 24, 2010

FRB Issues Guidelines for Evaluating Capital Distributions

The FRB issued guidelines (the “Guidelines”), set forth in a temporary addendum to SR letter 09-4, for evaluating proposals by large bank holding companies to undertake capital actions, including increasing dividend payments or stock repurchases.  The Guidelines apply to the 19 large bank holding companies that participated in the Supervisory Capital Assessment Program (the “SCAP”) in 2009:  Citigroup Inc., J.P. Morgan Chase & Co., Wells Fargo & Co., Goldman Sachs Group, Morgan Stanley, MetLife, PNC Financial Services Group, US Bancorp, Bank of New York Mellon Corp., SunTrust Banks Inc., State Street Corp., Capital One Financial Corp., Fifth Third Bancorp, BB&T Corp., Regions Financial Corp., American Express Co., Keycorp, and GMAC.  The FRB stated that it will review the Guidelines on or before December 31, 2011. 

These 19 large bank holding companies will be required to submit a comprehensive capital plan, which the FRB strongly encouraged to be filed by January 7, 2011.  Such capital plans will include a “stress test” of the bank holding company’s ability to absorb losses over the following two years under several economic scenarios, including an adverse macroeconomic scenario specified by the FRB.  The capital plan must also address the bank holding company’s plans to address the proposed Basel III capital requirements and the anticipated impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the bank holding company’s business model or capital adequacy.  If applicable, the bank holding companies must also address their plans to repay U.S. government investments through the Troubled Asset Relief Program.  The FRB will also review the bank holding company’s exposure to losses if it is required to repurchase mortgages and mortgage-related securities.  Unlike the SCAP, the results of the stress tests included in these capital plans will not be made public.  The FRB noted the high value of horizontal reviews across groups of firms and indicated that it plans to undertake capital plan reviews on a regular basis in consultation with the other federal banking agencies.

The FRB indicated that it expects to respond to capital distribution requests by such bank holding companies beginning in the first quarter of 2011.  Bank holding companies with outstanding U.S. government investments in the form of preferred shares or common equity must repay such investments prior to increasing dividends or implementing stock repurchases.  The FRB stated that it expects that plans submitted in 2011 will reflect conservative dividend payout ratios and net share repurchase programs and indicated that requests that imply a dividend payout ratio above 30% of after-tax net income will receive particularly close scrutiny.