Basel III Capital Rule for Subchapter S Banks

Kennedy Sutherland attorney, Patrick J. Kennedy, Jr., sent a letter to Chair Yellen, Comptroller Curry and Chairman Greenberg expressing continued concern regarding the unequal treatment depository institutions and their holding companies that elect to be taxed under Subchapter S of the Internal Revenue Code (IRC) receive compared to their peers taxed under Subchapter C, especially when considered in the context of the capital conservation buffer rules presently contained in Basel III and regulatory dividend restriction policy.

In addition to revisiting the dividend restriction rule contained in the Basel III Capital Conservation Buffer provisions, he encouraged the Agencies to support efforts to expand access to capital for Subchapter S banks by supporting an increase of the shareholder limit from 100 to 500 and permitting entities other than natural persons and trusts to hold shares of an S corporation. Finally, he encouraged the Agencies to support expansion of capital instruments for Subchapter S banks to include preferred stock.

These issues are of critical importance to one-third of the banks in the United States, 90% of which are under $1 billion in assets and serve as the essential credit back bone of smaller communities and their local businesses throughout the country.

In the letter Mr. Kennedy strongly urges the Agencies to embrace the Subchapter S bank community and undertake a concerted effort to promote their health and ability to raise capital and function as freely as possible in the best interest of their shareholders and communities. Mr. Kennedy further states that he believes this can only be achieved through discussion and policy-making that includes the needs and interests of Subchapter S banks at the outset of the process rather than as a mere afterthought.

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