Overview
Title
Regulatory Capital Rule: Eligible Retained Income; Correction
Agencies
ELI5 AI
The Federal Reserve fixed a small mistake about the rules banks use for deciding how much money they can safely give out as bonuses or share with owners. This fix makes sure the rules are clear and match what was already decided before.
Summary AI
The Federal Reserve System has made a correction to the definition of "eligible retained income" in its capital rule, which affects how banks calculate limits on capital distributions and bonuses. This change clarifies inconsistencies introduced by the stress capital buffer rule and aligns with definitions set in previous rules from March and October 2020. The corrected rule is effective from January 15, 2021. For more details, contact the legal team at the Federal Reserve using the provided phone numbers.
Abstract
The Board of Governors of the Federal Reserve System (Board) is correcting changes to the definition of eligible retained income in the capital rule. This definition is used for calculating limitations on capital distributions and discretionary bonus payments and was adopted in an interim final rule published on March 18, 2020, and as a final rule published on October 8, 2020.
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AnalysisAI
This document from the Federal Reserve System announces a correction to the definition of "eligible retained income" in its capital regulations. Originally adopted in rules published in March and October 2020, this definition plays a crucial role in determining the limits on capital distributions, such as dividends and stock repurchases, and the payment of discretionary bonuses by banks. The correction intends to resolve inconsistencies brought about by a subsequent rule related to the stress capital buffer, which unintentionally altered the previously established definition.
Summary
The Federal Reserve has identified and corrected a divergence in its capital regulation language that inadvertently arose from overlapping rules. This nuanced change may not immediately appear significant to the general public, but it holds considerable weight within financial regulatory circles. It is effective as of January 15, 2021, and should realign the compliance landscape with the regulatory intentions set out in the initial 2020 rules.
Issues and Concerns
The primary issue with the document is its technical nature, which might obscure understanding for those unfamiliar with banking regulations. It bundles multiple references to distant rules—the ERI interim and final rules, and the SCB final rule—without fully explaining each. This could lead to confusion among stakeholders and inhibit broader public comprehension. The document also lacks an explanation of the initial error's root cause, potentially raising questions about the clarity and transparency of the rulemaking process.
Impact on the Public
Broadly, the public may see indirect effects from this regulatory adjustment, as the stability and soundness of the banking system influence economic confidence and financial security. However, the everyday impact on bank customers and the average individual may largely go unnoticed unless it affects bank profitability significantly enough to alter services, fees, or investment returns over time.
Impact on Specific Stakeholders
For banks, this correction stabilizes the regulatory environment by ensuring clear and consistent guidelines on capital distribution. This clarity helps financial institutions maintain compliance and strategically manage their retained earnings. On the legal and compliance side, professionals dealing with financial regulations can interpret the amendments more precisely, aiding in better financial oversight and consistent enforcement.
In conclusion, while technical, this correction holds critical importance for financial regulation, ensuring that banks operate under clear, predictable rules that align with regulatory intent. It underscores the necessity for meticulousness in rule-making within the complex financial framework.
Issues
• The document involves amendments to technical financial regulations, which may be difficult for a general audience to understand due to technical jargon and legal references.
• The document references multiple rules (ERI interim final rule, ERI final rule, SCB final rule) without providing a concise explanation of what each rule entails, which may lead to confusion.
• There could be a lack of clarity for those who are not familiar with the documents and systems referenced, such as the FR Y-9C or Call Report.
• The document corrects a definition but does not provide a clear rationale for why the original inconsistency occurred, which may be important for regulatory transparency.