October 29, 2019

Banking Agencies Adopt Community Bank Leverage Ratio Rule

The Federal Reserve Board, FDIC and OCC (collectively, the "agencies") adopted a final rule designed to simplify capital requirements for qualifying community banks.

As previously covered, the community bank leverage ratio framework is a "simple alternative methodology to measure capital adequacy" and will provide substantial regulatory relief to smaller banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act.

The final rule was approved with multiple modifications based on comments received concerning the proposal. Specifically, the final rule will:

  • base the numerator of the community bank leverage ratio on tier 1 capital;

  • delete the qualifying criteria for mortgage servicing assets and deferred tax assets as a result of "temporary differences";

  • "simplify" the final rule's framework by eliminating the principal component analysis (or "PCA") proxy levels; and

  • consider banking organizations to be "well capitalized" during a two-quarter grace period if they maintain a certain leverage ratio and use the community bank leverage ratio framework.

The agencies stated that the final rule will become effective on January 1, 2020 and the community bank leverage ratio framework will become available on March 31, 2020.

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