The three federal bank regulatory agencies issued proposed changes to the community bank leverage ratio framework in accordance with statutory authority and requested public input from affected stakeholders.
By incorporating the proposed revisions, the agencies hope to reduce regulatory burdens and provide community banks with greater flexibility and optionality in their capital management approach, according to a joint press release published by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
According to the release, the proposed modifications were tailored to reflect “a deeper understanding of the unique business models, risk profiles, and operational realities of community banks.”
Adopted in 2019, the community bank leverage ratio was meant to simplify regulatory capital requirements for community banks by allowing them to adopt a relatively simple leverage ratio to measure capital adequacy. When a bank opts in to the framework, it is not required to calculate and report risk-based capital ratios.
The proposal would lower the community bank leverage ratio requirement to 8 percent from 9 percent. It would also extend the grace period, from two quarters to four quarters, for community banks that choose to opt in to the framework and for banks that fall out of compliance to come back into compliance.
“My understanding is that the proposal is not expected to lead to material reductions in the amount of capital in community banking organizations,” Federal Reserve Gov. Michael Barr said in a statement. “In the comment process, I would be especially interested in comments on the appropriate level of capital for community banks and whether the assumption that there will not be material capital reductions is correct.”
Barr further noted he would be particularly interested in understanding whether there are mechanisms to ensure that eligible banks with nontraditional, higher-risk profiles have capital requirements commensurate with their risk or should be excluded from eligibility.
The proposal would continue to require a level of capital that is consistent with ensuring the safety and soundness of community banks and comparable to– or higher than – the amount required under the risk-based capital framework. It would also maintain a leverage ratio that is double the minimum leverage ratio applicable to community banks that do not opt into the framework.
“These changes demonstrate the agencies’ ongoing commitment to focusing attention on community banks and their vital role in local economies, while ensuring appropriate safeguards remain in place,” according to the release. “The proposed modifications provide community banks with enhanced options to manage their regulatory obligations while maintaining their ability to serve their communities.”
Interested stakeholders will have 60 days to comment on the proposal from its Nov. 25 publication date in the Federal Register.