Banking and Finance Law Daily Banking agencies lower community bank leverage ratio
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Monday, April 6, 2020

Banking agencies lower community bank leverage ratio

By Colleen M. Svelnis, J.D.

The banking regulatory agencies have made modifications to the community bank leverage ratio framework, lowering it to 8 percent for the rest of 2020 and establishing a gradual transition higher throughout 2021.

The Office of the Comptroller the Currency, Federal Reserve System, and Federal Deposit Insurance Corporation have issued two interim final rules that make changes to the community bank leverage ratio (CBLR) framework. These changes are being made to implement Section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in order to provide temporary relief to community banking organizations. Under the CARES Act, the agencies are required to temporarily lower the CBLR to 8 percent.

CBLR framework. The CARES Act required the federal banking agencies to develop a simpler way for community banking organizations to demonstrate their capital adequacy. The rule establishing the CBLR framework went into effect Jan. 1, 2020. The CBLR framework removed requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that opts into the framework.

Usually, in order to qualify for the CBLR framework, a community banking organization must: maintain a leverage ratio greater than 9 percent; have less than $10 billion in average total consolidated assets; have off-balance-sheet exposures of 25 percent or less of total consolidated assets; have trading assets plus trading liabilities of 5 percent or less of total consolidated assets; and not be subject to the advanced approaches capital rule.

Temporary changes in CBLR. The first interim final rule provides that, as of the second quarter 2020, and continuing until the end of the year, a banking organization with a leverage ratio of 8 percent or greater may elect to use the community bank leverage ratio framework. The second interim rule establishes the gradual transition the community bank leverage ratio will go through until the end of 2021. The community bank leverage ratio will be 8 percent beginning in the second quarter and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. The agencies also set forth a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent below the applicable community bank leverage ratio. The community bank leverage ratio requirement will not be re-established at greater than 9 percent until Jan. 1, 2022. This gradual transition is intended to allow community banking organizations to focus on supporting lending to creditworthy households and businesses.

The interim final rules are applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. The changes will be effective as of the publication of the rules in the Federal Register. Comments are due by 45 days after publication in the Federal Register.

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