By: Crystal Huffman
On September 17, 2019, the FDIC approved a final rule aimed at providing regulatory relief to community banks by providing them with a simplified method of complying with regulatory capital adequacy standards. Under this rule, almost all banks with assets of less than $10 billion are given the option to satisfy compliance with capital requirements by maintaining a Tier 1 Leverage Ratio greater than 9%, referred to as the community bank leverage ratio or CBLR. Fortunately, under the final rule, the required ratio is the same as banks currently calculate for regulatory capital purposes. The final rule uses the bank’s Tier 1 Capital as the numerator for determining the “community bank leverage ratio” whereas the proposed rule had used tangible equity as the numerator, requiring a separate calculation.
Banks choosing to utilize the CBLR framework will no longer need to calculate the bank’s risk -based capital or complete schedule RC-R on their Call Reports. Instead, the bank will submit a simplified capital schedule with its Call Report. The final rule goes into effect as of January 1, 2020, allowing banks to adopt the new framework as early as their March 31, 2020 Call Reports.
The final rule includes a grace period under the CBLR framework for banks that fall under the 9% threshold prior to the Prompt Corrective Action restrictions for being less than “well capitalized” become applicable. The CBLR framework provides a two-quarter grace period for banks that have a leverage ratio equal to or less than 9% but greater than 8%. Banks falling within this range this will still be deemed “well-capitalized” for two quarters so long as they meet all other requirements under the CBLR framework. However, if the bank fails to achieve a leverage ratio of greater than 9% by the end of the second quarter, the bank will no longer be deemed “well-capitalized” and will be subject to all traditional obligations and restrictions under Prompt Corrective Action statutes and regulations.
While community banks certainly welcome any regulatory relief, many community banks may be hesitant to opt into the new CBLR framework. For many institutions, the relief provided under the rule is only nominal. While the bank will no longer need to determine risk-based capital amounts, many banks may not view this task as particularly onerous. Instead, some community banks may decide that adopting a new framework and educating themselves on the new rule is more onerous than the perceived burden under the current framework.
Perhaps more importantly, banks may perceive the CBLR framework as having harsh consequences if the bank has a leverage ratio less than or equal to 9% for longer than two quarters. Banks with a leverage ratio less than or equal to 9% for more than two quarters would be subject to Prompt Corrective Action measures and would find themselves subject to caps related to interest rates on deposits, unable to accept brokered deposits, and may quickly find themselves being required to submit a capital restoration plan. The possibility of being subject to these restrictions, even with a leverage ratio of just below 8%, will likely dissuade many community banks from utilizing the new CBLR framework. However, despite these hesitations, the adoption of the CBLR framework by the FDIC (with the other federal regulatory agencies presumably soon to follow) can certainly be applauded as a good faith effort to provide regulatory relief to community banks.