Board Issues Supervisory Guidance and Regulations on Payment of Dividends, Stock Redemptions and Stock Repurchases at BHCs
February 27, 2009
Circular No. 12072

The Federal Reserve has released SR 09-4. This letter is intended to provide direction to supervisory staff and bank holding companies (BHCs) on the declaration and payment of dividends, capital repurchases and capital redemptions by BHCs in the context of their capital planning processes.

Although the letter largely reiterates longstanding Federal Reserve supervisory policies and guidance in light of recent market events, it also heightens expectations that a BHC will inform and consult with Federal Reserve supervisory staff sufficiently in advance of

  • declaring and paying a dividend that could raise safety and soundness concerns (e.g., declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid)
  • redeeming or repurchasing regulatory capital instruments when the BHC is experiencing financial weaknesses; or
  • redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred

While the principles discussed in this letter are applicable to all BHCs, they are especially relevant for BHCs that are experiencing financial difficulties and/or receiving public funds. In response to economic strains on bank earnings and capital, the Emergency Economic Stabilization Act of 2008 was enacted, one component of which is the U.S. Department of Treasury (Treasury) Capital Purchase Program (CPP).

The Federal Reserve is working with the other federal banking agencies to assist the Treasury in monitoring compliance efforts of banking organizations participating in the CPP and will continue to do so as additional programs entailing government investments in banking organizations (e.g., the Capital Assistance Program announced by the Treasury on February 10, 2009) are implemented going forward. This letter, therefore, also discusses special considerations for the supervisory review of dividend payments, capital redemptions and capital repurchases by BHCs that are CPP participants.

See SR 09-4 for full details.

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