Federal banking regulators recently announced they would lower the community bank leverage ratio temporarily in conjunction with the CARES Act.
The move will lower the leverage ratio from 9 percent to 8 percent, the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said in a joint statement.
The changes will modify the community bank leverage ratio framework, the regulators said, so that from the second quarter of 2020 through the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework. The regulators also stated that community banks will have until Jan. 1, 2022, before the leverage ratio requirement is re-established at more than 9 percent.
“Under the interim final rules, the community bank leverage ratio will be 8 percent beginning in the second quarter and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter,” the agencies stated. “The interim final rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent below the applicable community bank leverage ratio.”
Moody’s analysts said the move would provide relief to the banking industry during the pandemic.
“The regulatory capital relief gives banks additional capacity to extend credit during the coronavirus disruption and support the small businesses and consumers that community banks serve and the broader U.S. economy,” Moody’s analysts stated.
However, the analysts did say the change would negatively impact credit.
“The lower minimum capital requirement is credit negative for the U.S. community banks because it reduces banks’ buffer for unexpected losses and reduces the likelihood of early regulatory intervention,” Moody’s stated. “Additionally, reliance on only one simple leverage capital measure and ignoring risk-weights can create regulatory arbitrage, a credit negative.
“The flexibility can mask the buildup of higher risk assets, exacerbating risky portfolio concentrations, making a bank more susceptible to an economic downturn. While risk-based capital rules may impose a higher compliance burden, when mandated in conjunction with more simplified leverage metrics, a more comprehensive and creditor-friendly capital framework results.”