Federal Banking Agencies Propose Lower Community Bank Leverage Ratio Requirements

The federal banking agencies—the Federal Reserve, OCC, and FDIC—have issued a joint proposed rule to lower the community bank leverage ratio (CBLR) from greater than 9% to greater than 8%. The proposal would also extend the grace period for falling below the threshold by two quarters. If adopted, more banks could opt into the simplified capital framework—a simple leverage ratio of tier 1 capital to average total consolidated assets—and redeploy balance-sheet capacity to loans rather than regulatory capital.

The move is the latest deregulatory action by the Trump Administration. The agencies estimate approximately $64 billion in estimated additional lending capacity would follow. Forty-eight percent of eligible community banks have adopted the current CBLR framework. As proposed, at least 2,000 other community banks would be eligible to adopt the framework.

Comments are due January 30, 2026.

Key Takeaways

• The threshold would drop to 8%. The proposed rule would lower CBLR requirement from the current 9% to 8%, the statutory floor in EGRRCPA section 201. Congress temporarily mandated the 8% level during the pandemic under the CARES Act; the agencies now propose to make it permanent.
• Lending capacity would increase. A lower CBLR requirement frees up balance sheet assets. Community banks could convert that capacity into more credit for consumers and businesses.
• Grace period would expand. Grace period would expand. Banks that fall below 8%, but remain above 7%, would have four quarters rather than two quarters to return to compliance (so long as they have not fallen below 8% for eight of the last 20 quarters). This change responds to industry concerns that the current framework penalizes short-term fluctuations.
  
  
  • Credit losses, for example, may cause leverage ratios to decline: the losses are absorbed by tier 1 capital, which makes up the numerator.
  • Smaller banks often lack ready access to equity markets and cannot raise capital as rapidly as larger institutions. The proposed fix should give qualifying banks more flexibility.
• More banks could use the CBLR. The agencies view the CBLR as "significantly less burdensome than the risk-based capital requirements." By simplifying and incentivizing further use of the CBLR, more banks might move away from complex risk-weighting operations.
• Easier capital compliance might spur deals. Easier compliance means more qualifying banks may satisfy regulatory capital requirements. "Well-capitalized" banks enjoy broader powers, more expedited approvals, reduced filing requirements, and easier access to brokered deposits. A simpler path may encourage M&A transactions and investments—particularly in a market already trending toward consolidation. Although many community banks can merge, it doesn't mean they should. Many look to mergers to scale and acquire technology to be able to compete effectively in the market. Changes to the CBLR may make mergers more palatable for investors or other owners.
• Simpler, but not necessarily lower capital. CBLR compliance does not always result in "less capital" than the risk-based capital adequacy requirements. But it is a simplified and more straightforward metric that likely saves time and resources.
• Eligibility criteria would remain unchanged. Despite some regulators informally describing community banks as those with less than $30 billion in total assets, the proposed CBLR would still apply only to banks that have less than $10 billion in average total consolidated assets and simple structures and operations.

Qualifying Banks

Many, but not all community banks qualify for the CBLR framework. To qualify for the CBLR framework, a bank, in addition to having a leverage ratio of greater than 8%, would still need to meet all of the following conditions:

• Have less than $10 billion in average total consolidated assets
• Have off-balance-sheet exposures of 25% or less of total consolidated assets
• Have trading assets plus trading liabilities of 5% or less of total consolidated assets
• Not be an advanced approaches banking organization

Calculating the CBLR

The CBLR is a simple metric that replaces tomes of U.S. risk-based capital regulations. At a high level, a qualifying bank would merely need to make sure that:

(Qualifying community banks do not need to make adjustments and deductions related to tier 2 capital for certain purposes.)

"Tier 1 capital" is the sum of common equity tier 1 capital and additional tier 1 capital. It is the highest quality capital, essentially the core measure of a bank's financial strength and designed to absorb losses on a going-concern basis.

Questions to Consider

The agencies pose several questions that commenters should consider, including possible reforms to the CBLR numerator.

The proposal asks whether tangible GAAP equity, excluding Accumulated Other Comprehensive Income, might be a better numerator. Tier 1 capital is the current numerator for the CBLR and is predominantly based on common equity.

Using tangible GAAP equity for the CBLR numerator would result in an easier but possibly harder to satisfy calculation—especially for banks with goodwill, particularly in an M&A rich environment.

• Tier 1 capital is generally broader, more flexible, and more consistent with Basel's international standards, though harder to calculate as it depends on regulatory definitions and interpretations to arrive at tier 1 capital.
• With a GAAP-based numerator, a bank could take its assets and subtract its liabilities and then also remove any intangible assets (e.g., goodwill, trademarks, other non-physical assets). That is more of an accounting than a bank regulatory exercise.
• But M&A creates goodwill, and thus the new metric might penalize acquisitive qualifying banks and restrict credit availability—undercutting one of the proposed rule's goals.
• A GAAP-based metric would move the U.S. further away from tier 1 standardization under the international Basel framework, possibly a larger trend to watch.

In light of these considerations and trade-offs, we imagine banks and industry associations will want to weigh in on this issue.

Our Take

While larger capital reforms are underway, this is a meaningful step to provide smaller institutions relief and promote lending and other transactions, based on the statutory text and agency experience. Commenters should engage with the regulators with their ideas about all issues and considerations that would expand credit access and the benefits of this relatively simple metric.