Banking Regulators Propose Modifications to Community Bank Leverage Ratio

The Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation issued a proposed rulemaking to revise the Community Bank Leverage Ratio ("CBLR") framework to encourage broader adoption of its use (which is optional) and provide greater flexibility for community banks.

In the notice, the regulators explained that the CBLR framework is an optional, simplified capital framework available to "qualifying community banking organizations." These are generally institutions with less than $10 billion in total consolidated assets that meet other prudential criteria, such as limits on off-balance sheet exposures and trading assets and liabilities.

The proposed rulemaking would:

1. Lower the Community Bank Leverage Ratio. The proposed rule would reduce the CBLR requirement from 9 percent to 8 percent. The regulators noted that while the 9 percent threshold was intended to ensure strong capital levels, lowering the ratio to 8 percent would still require capital levels double the minimum leverage ratio applicable to non-CBLR banks, while allowing approximately 475 additional community banks to qualify for the framework. The CBLR would continue to be calculated as tier 1 capital divided by average total consolidated assets.
2. Extend the compliance grace period. Under the proposed rule, the grace period for a community bank that opts into the framework but subsequently falls out of compliance would be extended from two quarters to four quarters. To use the grace period, the bank must maintain a leverage ratio greater than 7 percent; a bank that falls to 7 percent or below must immediately comply with the generally applicable risk-based capital standards.
3. Establish safeguards for grace period usage. To ensure the extended grace period is not used as a permanent state of non-compliance, the proposal would limit a community bank’s ability to rely on the grace period to a maximum of eight quarters within any rolling twenty-quarter period.

The regulators explained that the proposed changes are intended to reduce regulatory burden and recognize the unique operational realities of community banks by: (i) increasing the number of institutions that can opt out of complex risk-based capital calculations; (ii) providing greater optionality for capital management in rural and underserved markets; and (iii) maintaining safety and soundness by keeping capital requirements comparable to or higher than those under the risk-based framework.