A final rule that gives qualifying community banks the option to use a “simplified” measure of capital adequacy instead of risk-based capital, beginning with their March 31, 2020, call reports, was approved Tuesday by the board of the federal bank deposit insurer.
The community bank leverage ratio (CBLR) framework, created in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA, S. 2155), was approved by the Federal Deposit Insurance Corp. (FDIC) Board with several modifications from the proposed rule issued jointly by the FDIC, the Office of the Comptroller of the Currency (OCC), and the Federal Reserve Board.
Under the final rule, a community banking organization may qualify for the CBLR framework if it has a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. But in response to commenters, and with a stated goal of balancing reduced burden with safety and soundness, the agency board replaced the proposed tangible equity measure with the current calculation of tier 1 capital as the numerator of the CBLR.
The proposed PCA proxies are also removed from the final rule; the two-month grace period provided in the rule therefore will depend on the bank’s leverage ratio. Under the final rule, an electing banking organization that has a leverage ratio that is greater than 8% and equal to or less than 9% is allowed a two-quarter grace period after which it must either (i) again meet all qualifying criteria or (ii) apply and report the generally applicable rule.
“An electing banking organization with a leverage ratio of 8% or less is not eligible for the grace period and must comply with the generally applicable rule, i.e. for the quarter in which the banking organization reports a leverage ratio of 8% percent or less,” the rule states. “An electing banking organization experiencing or anticipating such an event would be expected to notify its primary federal supervisory agency, which would respond as appropriate to the circumstances of the banking organization.”
As proposed, advanced approaches institutions may not qualify for the CBLR.
The final rule was approved during the board’s open meeting with no dissenting votes. The FDIC said it will issue a compliance guide to accompany the rule.
In voting on the summary agenda, the agency board also on Tuesday added the CBLR framework to the deposit insurance assessment system. It also finalized a rule that permits non-advanced approaches banking organizations to use the simpler regulatory capital requirements for mortgage-servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and minority interest when measuring their tier 1 capital as of January 1, 2020. Banking organizations may use this new measure of tier 1 capital under the CBLR framework, the agency said.