The federal banking regulators lowered the community bank leverage ratio (CBLR) via a final rule issued on April 24. By lowering the CBLR requirement from 9 percent to 8 percent, the agencies hope to encourage more community banks to adopt the framework.
Federal Reserve, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) indicated the reduced CBLR will apply to qualifying FDIC-supervise financial institutions that have less than $10 billion in total consolidated assets, use standardized capital calculation models rather than “advanced approaches” and elect to use the CBLR framework.
In addition to the ratio reduction, the final rule will also double the grace period (from two quarters to four quarters) for community banks to either satisfy the definition of a qualifying community banking organization under the CBLR framework or to achieve compliance with risk-based capital requirements. It also limits a community bank to using the grace period for a maximum of eight out of the prior 20 quarters.
“Providing the option to use simplified capital standards gives community banks meaningful and necessary regulatory flexibility while advancing the OCC’s support for the long-term health and vitality of these indispensable institutions,” Comptroller of the Currency Jonathan Gould said in a statement. “The OCC remains committed to targeted regulatory reforms that ease the burden on community banks and foster local economic growth. I look forward to the implementation of this final rule and the impact it will have on consumers and communities while preserving safe and sound operations.”
American Bankers Association President and CEO Rob Nichols said in statement the new rule “makes meaningful adjustments to the CBLR framework while preserving the strong capital foundation of the banking system.”
“Regulators’ decision to lower the ratio to 8 percent and extend the grace period for qualifying community banks will help ensure the simplified framework works as intended,” Nichols said. “This will allow community banks to do even more to serve customers, strengthen local economies, and support small businesses, farmers, and families — while maintaining safety and soundness.”
Independent Community Bankers of America (ICBA) President and CEO Rebeca Romero Rainey commended the federal regulators for issuing a final rule, noting her organization has advocated for such a reduction “since regulators rescinded CBLR relief at the end of 2021.”
“As ICBA said in a letter to the federal banking regulators and in a separate letter to the Federal Reserve last year, reducing the CBLR from 9 percent to 8 percent will provide community banks additional room on their balance sheets to meet the credit needs of their local communities to support ongoing economic growth,” Romero Rainey said in a statement.
She also noted ICBA’s support for the Community Bank LIFT Act (H.R. 5276), sponsored by Rep. Young Kim’s (R-Calif.), which recently passed the House Financial Services. The legislation proposes to further lower the CBLR to a range of 6-8 percent and permit banks with up to $15 billion in assets to use the framework.