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November 2025

Common Capital Distributions Among Community Banking Organizations Requiring Federal Reserve Approval
by Alex Kobulsky, Lead Financial Institution Policy Analyst, Division of Supervision and Regulation, Federal Reserve Board

Capital is broadly defined as the difference between a bank’s assets and its liabilities. Capital serves many important purposes as it:

• funds a bank’s operations;
• acts as a financial cushion to absorb unanticipated losses; and
• provides protection to uninsured depositors and debt holders if a bank were to fail and be placed into receivership by the Federal Deposit Insurance Corporation (FDIC).

Federal regulators have long placed a high priority on assessing the adequacy of banks’ and holding companies’ capital in their efforts to promote a safe and sound banking system. Many years ago, examiners would evaluate capital adequacy at institutions on a case-by-case basis. Now, a robust framework of statutes and regulations defines regulatory capital as well as required capital levels. The Federal Reserve Board’s capital requirements vary depending on the institution’s asset size and complexity.

Certain capital distributions by a state member bank or holding company are subject to regulatory approval. A better understanding of the capital distributions that require regulatory approval can help institutions implement a more effective capital planning process.¹ This article highlights examples of common capital distributions (outside of the applications process) by Federal Reserve–regulated community banks and holding companies that require the Federal Reserve’s approval.² In determining which capital distributions require supervisory approval, a regulated institution should consider the type of capital distribution, the legal entity within the organization (bank or holding company) making the capital distribution, and the financial effect of the capital distribution on the organization.

Dividends Requiring Regulatory Approval

Dividend payments represent a common capital distribution that could require the Federal Reserve’s approval. Dividends are distributions of earnings to owners and investors of the bank or holding company. In some cases, dividend payments may reduce capital to the point of supervisory concern. As a result, an institution needs to consider certain statutory and regulatory limitations for the payment of dividends.

State member banks must comply with Section 5 of the Board’s Regulation H (12 CFR 208.5).³ Under Regulation H, a state member bank must obtain prior regulatory and shareholder approval to pay dividends when such dividend payments would exceed the bank’s retained earnings, as reported in its Reports of Condition and Income (Call Report).⁴ The state member bank may transfer surplus capital to its undivided profits (retained earnings) account to use for dividends if the surplus amounts reflect transfers made during prior periods of undivided profits and if the bank obtained regulatory approval for the transfer.⁵

In addition, a state member bank must obtain prior regulatory approval to declare a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the following:

• net income earned during the current calendar year; and
• retained net income of the prior two calendar years as reported in the bank’s Call Report.⁶

In determining this limitation, any dividends declared on common or preferred stock during the applicable period, and any required transfers to surplus or a fund for the retirement of any preferred stock must be deducted from net earnings to determine net income and retained net income.⁷

Regulatory approval of dividends is also covered in the Board’s Regulation Q,⁸ which establishes minimum capital requirements and overall capital adequacy standards for state member banks, as well as certain bank holding companies and savings and loan holding companies (“Regulation Q-covered holding companies”). Regulation Q limits capital distributions and discretionary bonus payments for state member banks and Regulation Q–covered holding companies through a requirement called the capital conservation buffer. The capital conservation buffer limits capital distributions when applicable institutions fail to hold a specified amount of common equity tier 1 capital in addition to the amount of regulatory capital necessary to meet the minimum risk-based capital requirements. A state member bank’s or Regulation Q–covered holding company’s capital conservation buffer must be greater than 2.5 percent of its risk-weighted assets to avoid limitations on capital distributions and discretionary bonus payments.

A state member bank and a Regulation Q–covered holding company are required to receive prior regulatory approval of capital distributions, such as dividends, if the organization’s capital conservation buffer is less than 2.5 percent of its total risk-weighted assets and either of the following is the case:

• distribution exceeds the maximum payout amount allowed in 12 CFR 217.11 (calculated as eligible retained income⁹ times the maximum payout ratio); or
• eligible retained income is negative.

Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act directed the Federal Reserve and the other federal regulatory agencies to establish the community bank leverage ratio (CBLR) framework as a simple alternative to assess the capital adequacy of banks with less than $10 billion in total consolidated assets.¹⁰ State member banks and holding companies that qualify for and opt into the CBLR framework are considered to have met the generally applicable risk-based and leverage capital requirements in Regulation Q. As a result, banking organizations that qualify for and opt into the CBLR framework are not subject to the capital conservation buffer requirement in Regulation Q.

Repurchase or Redemption of Additional Tier 1 or Tier 2 Capital

If a state member bank or Regulation Q–covered holding company is seeking to repurchase or redeem additional tier 1 capital, or tier 2 capital, then regulatory preapproval is required.¹¹

For example, assume a bank holding company that has not opted into the CBLR framework with $9 billion in total consolidated assets was seeking to repurchase and retire a certain amount of outstanding preferred stock that qualifies as additional tier 1 capital. When this article was published, this capital distribution would require the Federal Reserve’s approval because the bank holding company would be covered by Regulation Q and the preferred stock qualifies as additional tier 1 capital (see 12 CFR 217.20(c)).

However, what happens if a holding company that is not required to comply with Regulation Q seeks to repurchase or redeem additional tier 1 or tier 2 capital? If it is a small holding company, the firm would generally be covered under the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (Small HC Policy Statement).¹² The Small HC Policy Statement applies to bank holding companies and savings and loan holding companies that:

• have pro forma consolidated assets of less than $3 billion;
• are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary;
• do not conduct significant off-balance-sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and
• do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission.

For firms covered by the Small HC Policy Statement, prior regulatory approval is not required for the repurchase or redemption of capital instruments.

Repurchase or Redemption of Common Equity Tier 1 Capital of 10 Percent or More of Consolidated Net Worth

In certain instances, a bank holding company is required to notify the Federal Reserve of capital distributions that would reduce its consolidated net worth in a significant way. The Board’s Regulation Y requires a bank holding company to provide prior notice to the Federal Reserve for any repurchase or redemption of common equity tier 1 capital that represents 10 percent or more of the bank holding company’s consolidated net worth when the bank holding company is:

• not well capitalized,¹³
• not well managed,¹⁴ or
• subject to any unresolved supervisory issues.

Regulation Y provides more information about the contents of a bank holding company’s filing notice with the appropriate Federal Reserve Bank.¹⁵

Enforcement Actions

A supervised institution may be subject to a formal enforcement action which may contain capital conservation provisions that include prior regulatory approval that the institution must obtain before the capital distribution. For example, a written agreement may require prior written regulatory approval before the bank or holding company can:

• declare or pay dividends;
• engage in share repurchases;
• make any other capital distributions in respect to its common shares, preferred shares, trust preferred shares, or other capital instruments; or
• make interest payments due on subordinated debt.

Conclusion

To be clear, this article does not cover the full body of capital distributions that require approval from the Federal Reserve. This article does, however, highlight some of the more prevalent statutes and regulations covering regulatory approval of capital distributions for Federal Reserve–supervised community banking organizations. The Federal Reserve is committed to advancing transparent and effective communication with supervised institutions during and outside of the examination process. Bankers with questions about proposed capital distributions can always reach out to their contacts at the Federal Reserve Banks with any questions about the Board’s capital rules.

Capital Requirements Resources

Regulation H

• 12 CFR 208.5

Regulation Q

• 12 CFR 217.11
• 12 CFR 217.20

Regulation Y

• 12 CFR 225.4
• Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (12 CFR 225, Appendix C)

Supervision and Regulation letter 09-04, “Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies”

Bank Holding Company Supervision Manual

• Section 2020.5, “Intercompany Transactions (Dividends)”
• Section 2090.2, “Control and Ownership (BHC Formations)”

Commercial Bank Examination Manual

• Section 3000.1, “Assessment of Capital Adequacy”
• Section 3025.1, “Dividends”

• ¹ See Jennifer Burns, “Capital Planning: Not Just for Troubled Times,” Community Banking Connections, Third Quarter 2013.
• ² For supervisory purposes, the Federal Reserve generally defines community banking organizations as those with less than $10 billion in assets. See www.federalreserve.gov/supervisionreg/community-and-regional-financial-institutions.htm.
• ³ The Board’s Regulation H (12 CFR 208.5) implements 12 U.S.C. 56 and 12 U.S.C. 60, as applied to state member banks pursuant to 12 U.S.C. 324.
• ⁴ See 12 CFR 208.5(d)(1). Although the language of Section 56 could imply that a dividend cannot be declared in excess of the limit even if regulatory approval were obtained, a “return of capital” to shareholders is allowed under Section 59 if the bank obtains prior regulatory approval and the approval of at least two-thirds of each class of shareholders.
• ⁵ See 12 CFR 208.5(d)(3).
• ⁶ See 12 CFR 208.5 and 12 U.S.C. 60.
• ⁷ The Commercial Bank Examination Manual’s Section 3025.1, “Dividends,” provides more information on Section 56 and Section 60 transactions.
• ⁸ See 12 CFR 217.
• ⁹ Eligible retained income is calculated as the greater of retained net income for the four preceding calendar quarters or the average net income for the four preceding calendar quarters.
• ¹⁰ For more detailed information on the applicability of the CBLR framework, see 12 CFR 217.12(a)(2).
• ¹¹ See 12 CFR 217.20(f); this approval process can be performed concurrently with the Reserve Bank’s approval under delegated authority. See 12 CFR 217.20(c)(vi) and 12 U.S.C. part 265.11(e)(5)).
• ¹² The Small Bank Holding Company and Savings and Loan Holding Company Policy Statement is available at 12 CFR 225, Appendix C.
• ¹³ As described in Regulation Y, a bank holding company is well capitalized if its consolidated total risk-based capital ratio is 10.0 percent or greater, tier 1 risk-based capital ratio is 6.0 percent or greater, and the bank holding company is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve Board to meet and maintain a specific capital level for any capital measure.
• ¹⁴ As described in Regulation Y, a bank holding company or depository institution is generally well managed if, at its most recent inspection or examination or subsequent review by the appropriate federal banking agency for the company or institution (or the appropriate state banking agency in an examination described in Section 10(d) of the Federal Deposit Insurance Act (12 U.S.C. 1820(d)), the company or institution received: (a) at least a satisfactory composite rating; and (b) at least a satisfactory rating for management.
• ¹⁵ See 12 CFR 225.4(b).