The Federal Deposit Insurance Corporation’s Board of Directors has voted to propose a simpler method that qualifying community banks can use to measure their capital adequacy. The community bank leverage ratio (CBLR) framework will allow qualifying banks to satisfy generally applicable capital requirements, prompt corrective action well-capitalized ratio requirements, and all other applicable capital and leverage requirements with a single measurement.
At the same time, FDIC Chair Jelena McWilliams advocated for a “back to basics” approach to capital regulations for community banks in remarks at the Thirteenth Annual Community Bankers Symposium in Chicago. McWilliams suggested simplifying regulations and discussed the proposed Community Bank Leverage Ratio. Such measures would simplify compliance for community banks who already maintain sufficient capital levels, but are faced with significant costs when it comes to compliance. McWilliams also discussed FDIC actions to address issues facing community banks.
The proposed regulation amendments are required by the Economic Growth, Regulatory Relief, and Consumer Protection Act, and the Federal Reserve Board and Office of the Comptroller of the Currency are expected to propose comparable amendments to their rules. The EGRRCPA requires the agencies to adopt rules creating a CBLR of between 8 percent and 10 percent for community banks with total consolidated assets of less than $10 billion. The measurement is intended to simplify compliance for community banks without reducing the capital they hold and require that banks with higher risk profiles remain subject to generally applicable capital requirements.
The agencies have settled on a CBLR of 9 percent. However, understanding the CBLR requires understanding several definitions.
Qualifying community bank. The first specifies which banks qualify for the CBLR framework. To qualify, a bank must have:
- total consolidated assets of less than $10 billion;
- total covered off-balance sheet exposures of no more than 25 percent of its total consolidated assets;
- total trading assets and liabilities of no more than 5 percent of its total consolidated assets;
- mortgage servicing assets of no more than 25 percent of its CBLR tangible equity capital; and
- covered deferred tax assets of no more than 25 percent of its CBLR tangible equity capital.
An advanced approaches banking organization cannot qualify; neither can a bank that is subject to a written agreement, order, capital directive, or prompt corrective action directive.
CBLR calculation. A bank would calculate its CBLR by dividing its tangible equity capital by its average total consolidated assets.
Tangible equity capital would be the bank’s total equity capital exclusive of minority interest, accumulated other comprehensive income, deferred tax assets that arise from net operating loss or tax credit carryforwards, goodwill, and other intangible assets. Average total consolidated assets would be calculated similarly to the tier 1 leverage denominator the bank currently must calculate.
If the bank qualified, and the calculation yielded a result of more than 9 percent, the bank would meet all of its capital requirements.
Ceasing to meet standards. The proposal provides a two-calendar quarter grace period for a bank that falls out of compliance with the CBLR criteria. However, this does not apply to a bank that will no longer meet the standards after a merger or acquisition. Such a bank must meet the generally applicable capital standards “as of the completion of the transaction.”
If a bank’s CBLR falls to 9 percent or lower, it will be treated as less than well capitalized. It will be considered to be adequately capitalized, undercapitalized, or significantly undercapitalized, depending on the calculated ratio.
McWilliams: important role of community banks. McWilliams began her remarks by highlighting the crucial role played by community banks in meeting credit needs for small businesses. In fact, by mid-2018, 50 percent of small loans to businesses were held by banks with assets less than $10 billion, and loans to small businesses by small banks may be even greater. In 627 counties, community banks are the only banking offices. Given the significant impact of community banks, McWilliams cited the need for ensuring that regulations are tailored and not too complex to impede community bank survival.
Back to basics. McWilliams’ overarching theme during her remarks was a return to basics for community banks, including the need to simplify capital regulations. For example, Basel III focused too much on large banks; while most community banks maintained sufficient capital to exceed the new minimum thresholds set by the 2013 rules, they were faced with substantial compliance costs. McWilliams acknowledged the need for strengthening capital requirements but argued that requirements, as they relate to community banks, do not need to be complex.
The first step to simplifying capital requirements is the CBLR. An estimated 80 percent of community banks would be eligible. For banks that do not adopt the CBLR, the Economic Growth and Paperwork Reduction Act capital simplification proposal would “provide certainty and clarity to community banks,” McWilliams said.
McWilliams also suggested tailoring risk-based capital rules for community banks, including a review of capital ratios and buffers, and other complicated calculations. The goal of revisiting this approach would not be to reduce loss-absorbing capacity but to simplify ratio calculation and reduce compliance burdens on small banks.
McWilliams pointed out that the FDIC has also been working on the following areas:
- implementing provisions from the Economic Growth, Regulatory Relief, and Consumer Protection Act signed into law this year;
- rulemaking to change the regulatory capital treatment of high-volatility commercial real estate;
- interim rules to increase small institutions eligible for 18-month, on-site examination cycle;
- rulemaking that reciprocal deposits not be considered brokered deposits in some instances;
- comprehensive review of the approach to brokered deposits and national rate caps;
- interagency statement that supervisory guidance does not have the force and effect of law and not be used as a basis for enforcement actions; and
- improving de novo application process for bank formation.
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