On November 21, 2018, the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Board”), and the Federal Deposit Insurance Corporation (the “FDIC”) (collectively, the “Federal Banking Agencies” or the “Agencies”) jointly issued a notice of proposed rulemaking (the “NPR” or the “Proposal”) that would provide for an optional, simplified measure of capital adequacy for qualifying community banking organizations. The Proposal was issued pursuant to Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which Congress passed in May.
Under the Proposal, a depository institution or depository institution holding company with less than $10 billion in total consolidated assets would, subject to risk-based qualifying criteria, be deemed a “qualifying community banking organization.” A qualifying community banking organization would be eligible to opt into the CBLR framework (the “CBLR Framework”) if the organization had a community bank leverage ratio (“CBLR”) of greater than 9%. The CBLR would be calculated as the ratio of CBLR tangible equity, as defined in the Proposal, divided by average total consolidated assets.
A qualifying community banking organization that opted into the CBLR Framework (a “CBLR Banking Organization”) and that maintained a CBLR of greater than 9% would see several benefits. Significantly, the CBLR Banking Organization would be considered to have met the generally applicable leverage and risk-based capital requirements under the Agencies’ capital rules. If the CBLR Banking Organization were an insured depository institution, then it would also be considered to have met the well-capitalized capital ratio requirements under the Agencies’ prompt corrective action framework. In addition, the CBLR Banking Organization would report its CBLR and other relevant information on a simpler regulatory capital schedule relative to the Schedule RC-R of the Call Report and the Schedule HC-R of Form FR Y-9C. The CBLR Banking Organization would no longer be required to calculate or report the components of capital used in the calculation of risk-based capital ratios or the tier 1 leverage ratio, such as tier 1 capital, total capital, or risk-weighted assets.
In conjunction with the CBLR Framework, the Federal Banking Agencies also would make conforming amendments to various non-capital rules that contain references to a capital requirement, such as rules regarding lending limits, permissible investments, and transactions with affiliates, to ensure that such non-capital rules would continue to operate as intended.
A CBLR Banking Organization that ceased to meet any qualifying criteria would have a grace period of two reporting periods to come into compliance. With respect to an insured depository institution CBLR Banking Organization whose CBLR subsequently fell to 9% or less, the Proposal establishes CBLR levels to serve as proxies for the prompt corrective action capital categories as follows: adequately capitalized (CBLR ≥ 7.5%), undercapitalized (CBLR < 7.5%), and significantly undercapitalized (CBLR <6%).
The Federal Banking Agencies estimate that the vast majority of banking organizations under $10 billion in total consolidated assets would be eligible to use the CBLR Framework as currently proposed. Specifically, the NPR notes that, as of June 30, 2018, approximately 83% of insured depository institutions with less than $10 billion in total consolidated assets and 56% of depository institution holding companies with more than $3 billion and less than $10 billion in total consolidated assets would be eligible to opt in. The Proposal is not expected to impact holding companies with less than $3 billion in total consolidated assets because almost all of such holding companies are currently exempt from the Board’s capital rule and are instead covered by the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement.
The Federal Banking Agencies will accept comments on the Proposal for 60 days after publication of the NPR in the Federal Register. While comments on all aspects of the Proposal are welcome, the Agencies have posed 26 questions on specific aspects of the Proposal for commenters to consider.