ABA President and CEO Frank Keating wrote to the heads of the Federal Reserve and the OCC asking them to remedy a provision in the Basel III capital standards that disadvantages the 2,000 community banks organized as Subchapter S corporations.
Basel III’s capital conservation buffer prevents banks from making distributions to shareholders when capital falls below a threshold, but because federal tax liability passes through a Sub S bank to individual shareholders, Sub S shareholders might face tax liability even when they had not received a distribution. C corporation banks subject to the capital buffer pay any taxes due directly out of the bank’s income.
“The notion of applying the conservation buffers ‘identically’ does not lead to identical results in practice,” Keating wrote, urging the agencies to “develop and implement rules that have the same impact.” The FDIC, for example, recently said that it will generally approve dividend requests of up to 40% by Sub S banks with CAMELS ratings of 1 or 2.
Read the letter to the Fed.
Read the letter to the OCC.