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ICBA Responds to FDIC Guidance on Basel III Capital Conservation Buffer for S-Corps

Washington, D.C. (July 22, 2014)—The Independent Community Bankers of America® (ICBA) today responded to Federal Deposit Insurance Corp. (FDIC) guidance designed to help relieve many community banks structured as Subchapter S corporations from rules that would limit their ability to raise capital and serve their communities. The guidance encourages community banks to request case-by-case exceptions to the Basel III capital conservation buffer, which curtails capital distributions, such as shareholder dividends, when regulatory capital levels fall below preset thresholds.

“The Basel III capital conservation buffer is an immediate threat to the ability of many community banks to operate without undergoing a change in corporate structure, capital adequacy level or business model,” ICBA President and CEO Camden R. Fine said. “While the FDIC did not implement the ICBA-advocated exemption under the Basel III buffer rules for Subchapter S banks to pay dividends to their shareholders to meet their corporate tax obligations, ICBA nevertheless is encouraged the agency is listening to community bankers. We will continue to bring attention to the unfair regulatory treatment of Subchapter S banks under Basel III.”

The Basel III capital conservation buffer would harm the approximately 2,000 community banks structured as Subchapter S corporations, which pass through income and losses to their shareholders. Because income taxes are paid directly by S-corp shareholders, situations could arise in which shareholders have a material income tax obligation on taxable income earned by their bank but the bank is unable to pay enough dividends to meet the shareholders’ tax obligation. This would discourage community banks from being structured as Subchapter S corporations—punishing the banks that are the most efficient users of regulatory capital and the customers they serve.

The FDIC’s new guidance establishes criteria under which S-corp banks would be deemed to qualify for an exception from the buffer, such as highly rated institutions and those with sufficient capital to pay out dividends. Banks that don’t meet the published criteria could nonetheless apply for an exception and would be reviewed on a case-by-case basis.

In a February letter to the federal banking agencies, ICBA expressed its concerns about the impact of the capital conservation buffer on Subchapter S banks and recommended that the agencies amend the buffer to allow S-corp community banks to distribute at least 35 percent of their reported net income for a reporting period. The association will continue pursuing a legislative solution to mitigate the negative impact of the buffer on S-corp community banks and their communities.

About ICBA
The Independent Community Bankers of America®, the nation’s voice for more than 6,500 community banks of all sizes and charter types, is dedicated exclusively to representing the interests of the community banking industry and its membership through effective advocacy, best-in-class education and high-quality products and services.

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