Earnings hold the key to whether a bank qualifies for “expedited consultation” with regulators.
Recent clarification by the Federal Reserve about the timing of regulatory reviews of dividends paid by banks has raised a few questions and concerns for members of NeuGroup’s Bank Treasurers’ Peer Group.
- Even before the guidance, banks have delayed or considered delaying their dividend declaration dates to provide more time for back-and-forth with regulators over the payout.
- Experience suggests that approaching the Fed with a concrete plan and detailed analysis can help smooth and expedite the process.
Tricky times. As a result of the pandemic, more banks are facing a situation where earnings may not fully cover dividends. In those cases, what’s known as “SR 09-4” calls for banks to consult with regulators before a dividend is declared.
- For banks that declare dividends in connection with earnings, this has created “a compressed timeline to finalize earnings, determine the dividend and, if necessary, consult with the Fed,” Ben Weiner, a partner at Sullivan & Cromwell, said to members on a recent NeuGroup call.
- Given evolving views of bank dividends in the current macroeconomic environment and a shorter period to make decisions, it makes sense for banks to be proactive and talk to the Fed early, should SR 09-4 direct it to do so, Mr. Weiner said.
It’s all about timing. The amendment—called Attachment C—to SR 09-4 establishes criteria to determine whether a holding company can expect “expedited consultation” with its Federal Reserve Bank about its dividend plans.
- Generally, this applies when a holding company is “considering paying a dividend that exceeds earnings for the period for which the dividend is being paid,” Attachment C states.
- The criteria for an expedited response include having net income available to common shareholders over the past year sufficient to fully fund the dividend (and previous dividends over the past four quarters).
- The expedited response time for qualifying banks is two business days; other banks will receive a response in five business days.
Change of plans. One member said increased communication about the dividend with regulators following COVID-related loan losses caused his bank to delay its dividend declaration date.
- “We changed the dividend declaration date to be later, to the second month of the quarter, to be able to make the dividend request to the Fed. We have lived through this and changed the calendar to accommodate the Fed,” he said.
- In past years, another member’s bank had to wait more than a month for a response from the Fed on a different issue. He expressed worries about regulators’ response time on dividends for those in the non-expedited tier.
Be prepared. Another member advised peers to initiate conversations with regulators early, to present a plan and to focus on the particular quarter.
- “We’ve had quarterly losses, and we’ve had to go to the Fed with our plan,” the member said. “It is a quarter-by-quarter play. We went a week before and had a plan and presented it; by Friday they got back to us,” he added.
Looking ahead. Mr. Weiner, the attorney, said the full implications of Attachment C on banks likely won’t be known until the fourth quarter of 2020 or the first quarter of 2021, after it has been applied for one or two quarters.
