One of the many regulatory rule changes that was enacted in 2020 deals with the calculation of eligible retained income (i.e. the calculation performed to determine the maximum limit of eligible distributions). The new rule is effective for banks beginning on January 1, 2021.
This final rule applies to all community banks except those that have elected to use the Community Bank Leverage Ratio (CBLR) framework. Read more guidance on using the CBLR framework here.
If a bank has opted out of electing the CBLR, then the following now applies (the underlined portion is the final rule change):
- If a bank’s capital does not fall within the buffer requirement, other capital rules remain unchanged.
- Buffer requirement is common equity Tier 1 capital, of greater than 2.5% of risk-weighted assets.
- If capital falls within buffer requirement, then retained income is limited to the greater of:
- Net income for the four preceding calendar quarters, net of any distributions and taxes not reflected in net income
- The average of the bank’s net income over the preceding four quarters
Bankers will need to keep this rule change in mind if they have opted out of the CBLR to ensure they are not exceeding the amount of dividends allowable to be paid.
Please visit this link for more information: https://www.occ.treas.gov/news-issuances/federal-register/2020/85fr63423.pdf
