Bank Analysis School eBook

Steps for Calculating the Capital Conservation Buffer 1. Compare the bank’s risk-based capital ratios to the regulatory minimum risk-based ratios.

2. Determine the lowest difference between the each set of ratios. 3. Use that amount to determine the maximum payout ratio.

MaximumPayout Ratio The amount of eligible retained income a bank is allowed to pay out is dependent on the size of its buffer. The following picture shows the payout percentage in relation to the buffer size. The FDIC retains the right to deny dividends or discretionary bonus payments, despite the size of the bank’s buffer, if the payment threatens the safety and soundness of the institution. Conversely, the FDIC has the right to approve the payout of dividends and discretionary payments upon application by the bank if the buffer is below the thresholds. Maximum Payout Ratio

The following example illustrates the process for calculating the Capital Conservation Buffer and the related application of the buffer to the determination of the maximum payout ratio.

Example: Determination of Buffer and Limits Assumptions: Bank A has risk-based capital ratios as noted in the table and eligible retained income of $2,000.

Bank A’s Buffer (The Lowest Amount)

CET 1 RBC Ratio

Tier 1 RBC Ratio

Total RBC Ratio

Tier of Capital

Bank A’s RBC Ratios

7.5% 4.5%

8.5%

9% 8% 1%

Less: Regulatory Minimums

6%

Difference

3%

2.5%

1%

The 1% buffer is used to determine the applicable maximum payout ratio. If a bank has a buffer of 1%, the maximum payout ratio is 20%. As a result, Bank A would be able to payout 20% of its eligible retained income of $2,000 or $400.

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