Banking and Finance Law Daily FDIC adopts community bank leverage ratio rule
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Wednesday, September 18, 2019

FDIC adopts community bank leverage ratio rule

By Paul A. Ferrer, J.D.

The FDIC has adopted a rule that will make it simpler for smaller, simpler banks to satisfy capital adequacy requirements. It also advanced the availability of a simplified regulatory capital provision.

In May of 2018, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act, which required the federal banking agencies to develop a simpler way for community banking organizations to demonstrate their capital adequacy compared to the existing framework. The new FDIC rule introduces a simpler community bank leverage ratio (CBLR) framework for calculating and reporting capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must: maintain a leverage ratio (which is calculated by dividing tier 1 capital by average total consolidated assets) 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. A qualifying community banking organization that opts into the CBLR framework and meets all of those requirements will be considered to have met the well-capitalized ratio under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The rule includes a two-quarter grace period, which begins at the end of the calendar quarter in which the electing bank ceases to satisfy any of the qualifying criteria, during which a community bank that temporarily fails to meet any of the qualifying criteria generally would still be deemed well-capitalized so long as it maintains a leverage ratio greater than 8 percent (which is the leverage ratio generally supported by the American Bankers Association). At the end of the grace period, the bank must meet all qualifying criteria to remain in the CBLR framework; otherwise, the bank must comply with and report under the generally applicable risk-based and leverage capital requirements in the banking agencies’ capital rules. A banking organization that fails to maintain a leverage ratio greater than 8 percent would not be permitted to use the grace period. The grace period also does not apply in the case of a merger or acquisition.

The FDIC, Office of the Comptroller of the Currency, and Federal reserve Board also finalized another rule that permits banking organizations that are not subject to the advanced approaches capital rule to use the simpler capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and investments in the capital of unconsolidated financial institutions. The rule also simplifies for such organizations the calculation for the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties (that is, a minority interest) that is includable in regulatory capital. The rule permits banking organizations to adopt those simplifications as of January 1, 2020, rather than April 1, 2020, as initially provided.

Finally, the financial regulatory agencies finalized a rule that makes technical changes to incorporate the CBLR framework into the deposit insurance assessment system. A bank that uses the CBLR framework will not have any changes to how its assessment rate is calculated.

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