Our overview of the Top 10 Considerations for Financial Institutions in 2020 series noted that financial institutions will continue to face challenges in a number of corporate, compliance, and risk areas, especially in light of COVID-19 and a potentially slowing economy in 2020. Our third consideration for 2020 is capital. Once again in uncertain and challenging economic times, bank capital and liquidity is a focus of bank management and the regulators.
However, since the economic crisis of 2008, capital planning by financial institutions has been robust and capital ratios have generally been well above regulatory minimums. This has provided a healthy cushion for financial institutions to absorb a slowdown in economic activity while remaining well capitalized, including during the coronavirus pandemic. This is especially the case since regulators have added flexibility around capital and liquidity expectations, for example, by lowering the community bank leverage ratio to 8% and revising calculations made under the supplementary leverage ratio.
In light of the economic slowdown and uncertainty, many financial institutions are looking to the markets to attract low-cost funding—whether through subordinated debt offerings or other traditional capital raise efforts—as they see potential growth opportunities. In addition to growth, financial institutions are raising subordinated debt or secondary capital as a defensive strategy, or because there is a fear of missing out as competitors are raising funds.
Deals seem to be currently pricing at relatively low rates (depending on the size of the offering), making them a relatively attractive way to raise funds quickly to maintain liquidity as the economy recovers and we enter a very uncertain third and fourth quarter of 2020. Indeed, regulatory agencies are placing an increased focus on capital planning and resiliency specifically because of the economic uncertainty.
Alternatively, some institutions may be looking to issue dividends, and a number of institutions are considering the repurchase of shares to increase shareholder value, among other reasons. Here, it will be critical to consider the overall impact to the capital ratios and capital resiliency and to identify whether any specific regulatory guidance requires agency notice or approval for such dividend payments or stock repurchases. In some cases, agencies are capping dividend payouts or prohibiting stock repurchases.
1. What is your financial institution’s current capital position and potential to service subordinated debt?
2. Do your strategic goals include growth through branch or whole institution acquisitions? If so, would subordinated debt ease the financing of such acquisitions?
3. Is your institution continuing to pay dividends or considering stock repurchases? If so, are you subject to any specific guidance that limits these actions or requires advanced notice to an agency?
Howard & Howard has a dedicated team of financial services attorneys with deep experience handling complex transactional, regulatory, and litigation matters. Our attorneys regularly advise clients on M&A, strategic transactions, third-party engagement, enforcement matters, and regulatory compliance. For more information, or for questions related to this Financial Institutions Advisory, please contact the author(s), your Howard & Howard attorney, or visit us at https://howardandhoward.com/services/financial-banking/.