Banking Agencies Simplify Capital Requirements for Community Banks

November 2019

On October 29, 2019, the federal bank regulatory agencies finalized a new rule, known as the community bank leverage ratio (CBLR) framework, that simplifies capital requirements for qualifying banks, thrifts, and bank or thrift holding companies (referred to collectively in the new rule as “banking organizations”). The new rule offers an optional framework designed to relieve regulatory compliance burdens by allowing qualifying banking organizations to adopt a simple leverage ratio to measure capital adequacy instead of having to calculate and report risk-based capital ratios.

A qualifying banking organization that elects to use the CBLR framework and that maintains a tier 1 leverage ratio of greater than 9% will be considered to have satisfied its risk-based and leverage capital requirements and will be considered to have met the well-capitalized ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules.

To qualify for the CBLR framework, a banking organization must meet the following requirements:

  • less than $10 billion in total consolidated assets;
  • total off-balance-sheet exposures (as defined in the new rule) of 25% or less of total consolidated assets;
  • total trading assets plus trading liabilities, calculated in accordance with regulatory reporting requirements, of 5% or less of total consolidated assets;
  • leverage ratio greater than 9%; and
  • be a non-advanced approaches institution.

A qualifying banking organization may elect to use the CBLR framework even if its parent holding company is not a qualifying banking organization.

A qualifying banking organization would opt in to the CBLR framework by completing the appropriate line items in its call report and/or Form FR Y-9C, as applicable. Similarly, a banking organization may opt out of the CBLR framework and become subject to the generally applicable capital rule by completing the associated reporting line requirements, or, if between reporting periods, by providing its capital ratios under the generally applicable capital rule to its federal regulators.

If a banking organization that opted in to the CBLR framework subsequently fails to meet the criteria, it will have a two-quarter grace period either to meet the qualifying criteria again or to comply with the generally applicable capital rule. The grace period will begin as of the end of the calendar quarter in which a qualifying banking organization first fails at least one of the qualifying criteria and when the qualifying banking organization’s leverage ratio is 9% or less but greater than 8%. A qualifying banking organization that fails to maintain a leverage ratio greater than 8% would not be permitted to use the grace period and must comply with the generally applicable capital rule and file the appropriate regulatory reports. Further, no grace period is available for a banking organization that opted into the framework but ceases to meet the criteria based on a business combination (such as the consummation of a merger).

Off-balance-sheet exposures generally encompass qualifying criteria currently included in call reports and Form FR Y-9C, such as the unused portions of commitments; trade-related contingent items that arise from the movement of goods; transaction-related contingent items such as performance bonds, bid bonds, and warranties; off-balance-sheet securitization exposures; letters of credit; forward agreements that are not derivative contracts; and securities lending and borrowing transactions.

The final rule will be effective as of January 1, 2020, and a qualifying banking organization can utilize the CBLR framework for purposes of filing its regulatory reports for the first quarter for 2020 (that is, as of March 31, 2020).

If you have any questions, please contact Len Essig, Kylee Emert, or one of our Banking & Finance attorneys.