Federal Banking Agencies Adopt Lower Community Bank Leverage Ratio Requirements

The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have adopted a final rule that lowers the community bank leverage ratio (CBLR) from greater than 9% to greater than 8% and extends the grace period for banks that fall below the threshold from two quarters to four quarters. The final rule was adopted without change from the proposal.

As we mentioned in our detailed coverage of the proposed rule, the change should expand access to the simplified CBLR framework for more community banks and provide additional flexibility in their capital planning. It also is an option for de novo banks that seek a full national bank charter or other full-service state charters.

Key Takeaways

• By lowering the threshold to the statutory floor, the rule may enable more institutions to use a simpler leverage-based approach in place of more complex risk-based capital calculations.
• A lower CBLR requirement frees up balance sheet assets and community banks could convert that capacity into more available credit for consumers and businesses.
• The final rule doesn't change the existing eligibility criteria for the CBLR framework: Only banks with less than $10 billion in total consolidated assets are eligible.
• A bank still must meet the applicable asset, off-balance-sheet exposure, trading activity, and organizational requirements to qualify.

The CBLR finalization follows a package of interagency capital framework proposals applicable to banks of all sizes. Eligible banks that do not opt in to the CBLR would fall under the standardized approach, which the proposals would substantially revise. Among other changes, the revisions would reduce the risk weight for retail exposures from 100% to 90%, require the recognition of accumulated other comprehensive income for Category III and Category IV banks (which are not eligible for the CBLR), and lower capital requirements due to prepaid credit protection arrangements.

Our Take

Banks eligible for the CBLR should consider whether the streamlined leverage calculation under the CBLR is more advantageous than the standardized approach (current or proposed). Eligible banks with lower risk-weighted assets and that expect to grow quickly might benefit from the standardized approach.

Under the proposed interagency capital rules, the largest banks would be required to use the expanded risk-based approach (ERBA), which would replace today's advanced approaches. All other banks would be able to opt in to the ERBA, which CBLR-eligible banks currently may not do with advanced approaches. We do not anticipate many CBLR-eligible banks choosing to implement ERBA's complex rules and heightened standards, but their eligibility for the CBLR, standardized, and ERBA frameworks would give them the widest array of regulatory approaches to maximize net benefits.

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Max Bonici is a partner in Washington, D.C., Rich Zukowsky is counsel in New York, and Paige Knight is an associate in Washington, D.C. For questions or more insights, please reach out to the authors or another member of our financial services team and sign up for our alerts.