CSBS Issue Briefings - August 2020

Community Bank Leverage Ratio

CSBS Official Public Position

CSBS believes the community bank leverage ratio (CBLR) should be implemented to provide relief from the complexities of risk-based capital rules while not sacrificing the safety and soundness of community banks.

Summary

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 contained a provision requiring the federal banking agencies to establish a CBLR that would exempt banks of a certain size and risk profile from the current regulatory capital rules if they maintain a certain amount of tangible equity capital. The law required the FDIC, OCC and Federal Reserve to consult with state bank supervisors in establishing and implementing the CBLR framework. Over the course of late 2018 and early 2019, the federal banking agencies held multiple calls and meetings with state regulators, issuing a proposed rule in early 2019 and final rule in late 2019 to implement the CBLR. The proposed rule would have made the CBLR a tangible leverage ratio and established proxy Prompt Corrective Action (PCA) levels that would deem a bank that falls below a CBLR of 9% less than well capitalized. In multiple comment letters, CSBS expressed opposition to the proposed PCA proxies and advocated instead for banks that fall below the CBLR to be given a two-quarter transition period to either bring their CBLR back above 9% or to revert to risk-based capital reporting requirements. CSBS also took the position that the CBLR should be a Tier 1 leverage ratio because this a metric with which community banks are very familiar and preserves comparability across banks within and outside of the CBLR framework. Under the final rule, banks that satisfy certain qualifying criteria and have a Tier 1 leverage ratio greater than 9% could opt into the CBLR and would be exempt from risk-based capital reporting requirements. Banks that fall below the 9% level and/or fail to satisfy the qualifying criteria after opting in will have a two-quarter grace period to either raise their CBLR back above 9% and/or satisfy the qualifying criteria or revert to the current risk-based capital framework. Banks that fall below a CBLR of 8% in a single quarter must begin reporting risk-based capital immediately.

Why it Matters to State Regulators

The staggering complexity of the current regulatory capital rules imposes an unsustainable regulatory burden on community banks. The CBLR was intended to provide relief from this complexity. As finalized, the CBLR will hopefully provide the relief intended by Congress.

Talking Points

• The CBLR rule should not incorporate PCA proxies and should utilize a Tier 1 leverage ratio in order to provide the regulatory relief intended by Congress. • The FBAs should not implement the CBLR in a manner that creates regulatory burden rather than provide regulatory relief. SME Contact: Mike Townsley, Director of Regulatory Policy & Policy Counsel: (202) 728-5738 or MTownsley@csbs.org

FOR STATE REGULATOR USE ONLY