Financial Institutions I AUGUST 8, 2019

Banking Agencies Simplify Capital Rules and Eliminate Prior Approval Requirement for Common Stock Redemptions

On July 9, 2019, the Board of Governors of the Federal Reserve System (“FRB”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) (together, the “Agencies”) jointly issued a final rule to simplify the regulatory capital rules for banking organizations that do not use the “advanced approaches” capital framework–generally these are banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. The final rule simplifies the treatment of a number of capital components, including mortgage servicing assets, deferred tax assets, and investments in capital instruments of unconsolidated financial institutions. 

In addition, the final rule generally eliminates the need for bank holding companies (“BHCs”) and savings and loan holding companies (“SLHCs”) to seek prior approval from the FRB before redeeming common stock under the regulatory capital rules. The rule as originally proposed required prior approval before redeeming or repurchasing any common equity tier 1 capital instruments, additional tier 1 capital instruments, or tier 2 capital instruments. 

The final rule adds a new provision in Regulation Q (12 CFR 217) which eliminates the prior approval requirement for redemptions or repurchases of common equity tier 1 capital instruments by a BHC or SLHC unless prior approval is required by some other legal requirement. Unlike redemption or repurchase of common stock, redemptions and repurchases of additional tier 1 capital instruments and tier 2 capital instruments do require the prior approval of the FRB under the final rule.  

The regulatory capital components of the final rule become effective as of April 1, 2020, while the revisions to the prior approval requirements for common stock redemptions or repurchases by BHCs and SLHCs will become effective on October 1, 2019. 

Key Considerations:

  1. If you are considering a redemption or repurchase of common equity tier 1 capital, how does your timeline coincide with the effective date of the final rule–October 1, 2019? 
  1. If you have mortgage servicing assets, deferred tax assets, or investments in the capital of an unconsolidated financial institution, consider how the final rule impact financials and reporting.

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