Agencies Issue Notice of Proposed Rulemaking on Regulatory Capital Rule

Recently, the OCC, Board of Governors of the Federal Reserve, and the FDIC issued a notice of proposed rulemaking concerning an alternative methodology to measure capital adequacy for certain community banking organizations.  Comments must be received by April 9, 2019.

Pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Economic Growth Act), the OCC, Board, and FDIC (collectively, the Agencies), were directed to develop a community bank leverage ratio (CBLR) for qualifying community banking organizations.  Under the current proposal, the Agencies define a qualifying community banking organization as a depository institution or a depository institution holding company—that is not an advanced approaches banking organization—that meets the following criteria:

• Total consolidated assets of less than $10 billion;
• Total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidated assets;
• Total trading assets and trading liabilities of five percent or less of total consolidated assets;
• Mortgage servicing assets of 25 percent or less of CBLR tangible equity; and
• Temporary difference deferred tax assets of 25 percent or less of CBLR tangible equity.

The CBLR is defined by the Economic Growth Act as the ratio of tangible equity to the average total of consolidated assets as reported on the qualifying community banking organization’s applicable regulatory filing.  Importantly, tangible equity is considered to be the total bank equity capital or total holding company equity capital prior to including minority interests and excluding accumulated other comprehensive income.  The Agencies will use the organization’s risk profile in determining whether it will qualify for the CBLR alternative methodology.  Under the proposal, eligible entities may use the CBLR framework if their CBLR is greater than nine percent. 

If a qualifying community banking organization exceeds its CBLR level, it is considered to have met:  i) the generally applicable leverage and risk-based capital requirements under the Agencies’ capital rule; ii) the capital ratio requirements in order to be considered “well capitalized” under the Agencies’ prompt corrective action framework (in the case of insured depository institutions); and iii) any other applicable capital or leverage requirements.

The Agencies expect the CBLR calculation would require significantly less data than some current means of calculating capital requirements and therefore believe that a CBLR banking organization would be able to report its CBLR on a much simpler regulatory capital schedule.