Bank Analysis School - September 2023

JOB AID: Capital Conservation Buffer §324.11

This job aid covers the Capital Conservation Buffer, which begins its phase-in in 2016. The capital conservation buffer is intended to provide incentives for banks to hold sufficient capital to reduce the risk that their capital levels would fall below the minimum requirements during a period of financial stress. The rule incorporated a capital conservation buffer composed of common equity tier 1 capital in addition to the minimum capital requirements. A bank must to hold a capital conservation buffer greater than 2.5% of total risk-weighted assets to avoid limitations on capital distributions and discretionary bonus payments to executive officers. If a bank’s capital conservation buffer falls to 2.5% or less, its maximum payout ratio declines to a set percentage of eligible retained income based on the size of the bank's buffer. The types of payments that are subject to the capital conservation buffer’s restrictions are: • Dividends, • Share buybacks, Note: • The Federal banking agencies maintain the authority to impose further restrictions or require additional capital using supervisory actions as warranted given the bank’s risk profile. • The FDIC may permit a bank to make a distribution or discretionary bonus payment upon request of the bank if the FDIC determines that the distribution or discretionary bonus payment would not be contrary to the safety and soundness of the bank. Eligible Retained Income The restrictions on discretionary payments are based on the bank’s eligible retained income. Eligible retained income is a bank’s net income as reported in its Call Reports for the four calendar quarters preceding the current calendar quarter, net of any capital distributions, and certain discretionary bonus payments that were made during those four quarters. For example, when a bank is determining its eligible retained income as of the March 31, 2015, call report filing date, eligible retained income will include the net income for the four quarters of 2014, beginning with the December 2014 information and net income from the September, June, and March 2014 call reports. A bank cannot make capital distributions or certain discretionary bonus payments during the current calendar quarter if the banking organization’s eligible retained income is negative and its capital conservation buffer is 2.5% or less as of the most recent call report filing. • Discretionary payments on tier 1 instruments, and • Discretionary bonus payments to executive officers.

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