Capital proposal before FDIC Board is ‘first step’ toward simplifying requirements

Substantially simplifying capital requirements for community banks is a key priority for her, the chairman of the Federal Deposit Insurance Corp. (FDIC) board said Friday – and a proposal being considered Tuesday by the board is a “first step in the process.”

In remarks during an event focusing on community banks, held in Chicago Friday, FDIC Chairman Jelena McWilliams was a referring to the board’s consideration at its meeting next week of the Community Bank Leverage Ratio (CBLR). (Formally, the board will consider a notice of proposed rulemaking for changes to applicability thresholds for regulatory capital requirements and liquidity requirements.)

McWilliams said that, under the proposal, a qualifying bank with less than $10 billion in assets will not have to comply with the existing risk-based capital requirements if the bank meets a simple ratio of tangible equity to total assets. She said the three federal banking agencies will invite comment on a definition of tangible equity that is designed to be simple to calculate and to include high-quality, loss-absorbing capital.

“We estimate that over 80% of community banks will be eligible for the CBLR, based on the proposed calibration and qualifying criteria,” McWilliams said. “This was a key priority in designing the proposal – to ensure that the simple ratio would be available broadly.”

In order to qualify under the proposal, she said, banks will need to satisfy certain activity-related criteria. “A simple leverage ratio makes sense for small banks with traditional business models,” she asserted.

She also told the group that the proposal includes “a plethora of questions that we would like feedback on.” Once a rule is finalized, she said, she expected that many community banks will not have to apply the standardized approach. “Nonetheless, I still plan to revisit the capital regime that applies to those banks that do not adopt the CBLR,” she added.

A step in that process, McWilliams said, will be finalization of the capital simplification proposal issued last September (under the auspices of the Economic Growth and Paperwork Reduction Act, or EGRPRA), which she said would simplify and modify the capital treatment for mortgage servicing assets, certain deferred tax assets, and investments in unconsolidated financial institutions, such as Trust Preferred Securities (TruPS), among other provisions.

“While the agencies have thus far delayed finalization in light of consideration of other changes to the capital regime, I see no reason to delay any further,” she said. “Finalizing the capital simplification proposal will provide certainty and clarity to community banks and take a step toward simplifying the risk-based capital rules.”

In other comments, McWilliams said she wants to revisit the standardized approach more broadly for small banks that do not qualify for or use the CBLR. “I plan to work with my fellow banking regulators to consider how we can tailor the risk-based capital rules for community banks, recognizing that the risk-based regime should be simpler for them,” she said. “For example, I would like to look closely at the capital ratios and buffers community banks are subject to, and to revisit some of the more complicated calculations and risk-weightings currently required.”

Remarks by Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation, at the Federal Reserve Bank of Chicago Thirteenth Annual Community Bankers Symposium “Back to Basics”; Chicago, Illinois