The new community bank leverage ratio’s (CBLR) framework – including eligibility, capital stringency, and potential impact on system-wide capital levels under a hypothetical adverse scenario – is outlined in a new staff study published by the federal insurer of bank deposits.
The study’s conclusion: It will provide burden relief to a meaningful number of community banks while keeping them safe, sound.
The report, Analyzing the Community Bank Leverage Ratio (Report No. 2020-03), published by the Federal Deposit Insurance Corp. (FDIC), is intended, according to its authors (Bert Loudis, Daniel Nguyen, and Carlo Wix of FDIC staff), to analyze the extent to which the final rule implementing the CBLR rule meets its intended goals. Those are, the authors wrote: to simplify regulatory capital requirements and provide material regulatory compliance burden relief to qualifying community banking organizations that opt into the community bank leverage ratio framework.
The rule’s goals, they wrote, “were to provide this relief to a meaningful number of well-capitalized banks with less than $10 billion in total consolidated assets, while simultaneously maintaining the safety and soundness of individual banks and the banking system as a whole.” Generally, the framework established an optional capital framework that would exempt qualifying banks from risk-based capital requirements, the study stated.
The study concluded that more than 85% of community banks would be eligible to opt into the CBLR framework. For 97% of those, the CBLR framework would result in a more stringent minimum capital ratio than the existing generally applicable risk-based capital requirements, the study stated.
“Under the assumption that the remaining 3% will lower their capital ratios to maintain their current levels of excess capital, this study assesses an aggregate capital release of approximately $1 billion,” the study stated. “This amount is approximately 0.3% of the $283 billion in aggregate capital held by all eligible banks.”
The study also concluded that an off-balance-sheet criterion included in the rule “provides an effective backstop to the CBLR, which prevents CBLR banks from acquiring material amounts of potentially risky off balance sheet assets.”
As a result, the study concluded, the CBLR framework “will provide burden relief to a meaningful number of community banks without undermining the safety and soundness of the financial system.”