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Regulators approve greater flexibility with CBLR requirements

Apr 6, 2020

The federal banking agencies issued two interim final rules this week providing temporary relief to community banks that are deciding whether to opt in to the community bank leverage ratio (“CBLR”) framework. The interim final rules reflect the agencies’ actions to implement Section 4012 of the Coronavirus Aid, Relief and Economic Security Act, which requires them to temporarily lower the CBLR to 8 percent (from 9 percent). 

The interim final rules (1) permit community banks with a leverage ratio of 8% or greater that meet other qualifying criteria to opt in to the CBLR framework, and (2) provide for a graduated transition over two years back to the original 9 percent CBLR requirement. Specifically, the CBLR will be 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. The interim final rules also provide for a two-quarter grace period for a qualifying community bank that maintains a leverage ratio of 7 percent or greater.

The federal banking agencies finalized the CBLR framework on October 29, 2019, to simplify capital requirements for community banks. Community banks generally are those banks with less than $10 billion in total consolidated assets, limited amounts of off-balance sheet exposure and limited trading assets and liabilities. Such banks with a leverage ratio (i.e., the ratio of tier 1 capital to average total consolidated assets) greater than 9 percent are eligible to adopt the CBLR framework. By making the election, a community bank may use the CBLR framework to measure capital adequacy and need not follow the requirements for calculating and reporting risk-based capital ratios. Additionally, banks meeting the CBLR framework requirements are considered “well-capitalized” for purposes of Section 38 of the Federal Deposit Insurance Act.

To make the opt-in election, a qualifying community bank must complete the associated reporting line items required on its Call Report and/or Form FR Y-9C, as applicable. Once the election is made, the community bank becomes subject to the CBLR framework. The opt-in election, however, may be rescinded. A community bank may opt out of the CBLR framework and again become subject to the agencies’ generally applicable revised capital rule by completing the applicable reporting requirements on its Call Report and/or Form FR Y-9C for the next reporting period. In addition, a community bank is permitted to opt out of the CBLR framework between reporting periods by providing its capital ratios under the agencies’ generally applicable revised capital rule to its primary federal regulator at that time.

For any questions or additional information, please contact Kevin Tran at (615) 850-8743.

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