CSBS Issue Briefings - January 2020

CSBS ISSUE BRIEFING Community Bank Leverage Ratio

42T CSBS Official Public Position 19T42T

CSBS19T42T CSBS believes the community bank leverage ratio (CBLR) should be implemented to provide relief from the complexities of risk-based capital rules while not sacrificing the safety and soundness of community banks.

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42T Summary 19T42T

T4 The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 contained a provision requiring the federal banking agencies to establish a CBLR that would exempt banks of a certain size and risk profile from the current regulatory capital rules if they maintain a certain amount of tangible equity capital. The Act required the federal banking agencies (FBAs) to consult with state bank supervisors in establishing and implementing the CBLR framework. Over the course of late 2018 and early 2019, the FBAs held multiple calls and meetings with state regulators. The FBAs issued a proposed rule in early 2019 and final rule in late 2019 to implement the CBLR. The proposed rule would have made the CBLR a tangible leverage ratio and established proxy PCA levels that would deem a bank that falls below a CBLR of 9% less than well capitalized. In multiple comment letters, CSBS expressed opposition to the proposed PCA proxies and advocated instead for banks that fall below the CBLR to be given a two-quarter transition period to either bring their CBLR back above 9% or to revert to risk-based capital reporting requirements. CSBS also took the position that the CBLR should be a Tier 1 leverage ratio because this a metric with which community banks are very familiar and preserves comparability across banks within and outside of the CBLR framework. Under the final rule, banks that satisfy certain qualifying criteria and have a Tier 1 leverage ratio greater than 9% could opt into the CBLR and would be exempt from risk-based capital reporting requirements. Banks that fall below the 9% level and/or fail to satisfy the qualifying criteria after opting in will have a two- quarter grace period to either raise their CBLR back above 9% and/or satisfy the qualifying criteria or revert to the current risk-based capital framework. Banks that fall below a CBLR of 8% in a single quarter must begin reporting risk-based capital immediately. 42T The staggering complexity of the current regulatory capital rules imposes an unsustainable regulatory burden on community banks. The CBLR was intended to provide relief from this complexity. As finalized, the CBLR hopefully will provide the relief intended by Congress. 42T Talking Points 19T42T • 19T The FBAs should not implement the CBLR in a manner that creates regulatory burden rather than provide regulatory relief. 42T Why it Matters to State Regulators 19T42T

42T SME Contact: Mike Townsley, Director of Regulatory Policy & Policy Counsel: 202-728-5738 or mtownsley@csbs.org 19T42T 19T

42T Date Updated: 12/31/2019 19T42T