2019 Journal of Community Bank Case Studies

Juniata College

FIRST PLACE:

Simplified Capital Rules EGRRCPA contains many provisions which could potentially be of benefit to community banks. However, at present, there is still uncertainty as to how some of these provisions will translate into regulations. For instance, one of the main provisions which could impact smaller banks is the Simplified Capital Rules. In the legislation, capital is defined as tangible equity, for example, ownership shares, and the purpose of capital rules is to ensure that banks have a ‘cushion’ to absorb losses without fear of failure. The thrust of the new legislation is to allow banks, with less than $10 billion in assets, to opt for one simple capital ratio (called the Community Bank Leverage Ratio (CBLR)) rather than having to comply with the multiple risk-based measures currently in place. In order to opt for the simplified approach, a bank must be “well capitalized”. To this end, EGRRCPA states that the CBLR should be between 8% and 10% (capital to unweighted assets), as compared to the general leverage ratio requirement of 5% (CRS). The CBLR is drawing criticism from banks and state regulators who say it may be too complicated to implement and that the proposed 9% mid-point is too high (Witkowski). Kish, in tandem with other banks, is in a ‘holding pattern’ with respect to the CBLR as there are still too many uncertainties surrounding the provision and how it will be regulated. While Kish’s asset level falls within the required level for CBLR, management is unsure how this part of EGRRCPA could be of benefit to the bank. As of now, Kish believes

While Kish’s asset level falls within the required level for CBLR, management is unsure how this part of EGRRCPA could be of benefit to the bank.

that it will have no effect on the 2019 balance sheet or net income figure. Mr. Baxter sees the CBLR as a potential “double- edged sword”. Although it would eliminate the time required to calculate the other risk-based capital metrics, the bank is comfortable with both their calculation and what it must do to ensure that it stays within the parameters, that is, above 5%. Moreover, Kish prefers to maintain a ‘buffer’ of at least 50 basis points above the minimum capital ratio, something which most banks do, according to Chris Cole, Executive VP and Sr. Regulatory Counsel at the ICBA. Thus, as the new minimum may be at the relatively high 9% level, an additional buffer may be required which could cause issues for Kish. This is echoed by Sr. VP, Policy at the CSBS, James Cooper who said that it is “a pretty big jump, to go from a 5% to a 9% ratio” (Witkowski). Consequently, if Kish were to opt for the CBLR,

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