To Adopt, or Not to Adopt, That Is the Question.

On September 17, 2019, the Regulatory Agencies adopted a final rule implementing the Community Bank Leverage Ratio (CBLR) as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act.  This final rule provides the opportunity for certain community banking organizations to adopt new, voluntary, capital framework that is effective 1/1/2020, with the first reporting period being the 3/31/2020 Call Report.  This new rule has been adopted by all the Federal Regulatory Agencies (FDIC, Federal Reserve, and OCC).  Eligible institutions for CBLR adoption include community banking organizations with less than $10 billion in total consolidated assets and that meet the following criterion: 

• Leverage ratio greater than 9%
• Off-balance sheet exposures of 25% or less of total consolidated assets
• Trading assets plus trading liabilities of 5% of less of total consolidated assets
• Not an advanced approaches banking organization. 

The purpose of the CLBR is to provide community banking organizations with ‘regulatory relief’ coming in the form of a more streamlined and simplified quarterly Call Report preparation.  Under the CBLR framework, banks that ‘opt in’ would no longer need to risk-weight on- and off-balance sheet exposures on a quarterly basis.  As a result, capital ratios under the current framework (Tier 1 Leverage, Tier 1 Risk-Based Capital, Common Equity Tier 1 Capital Ratio, and Total Risk-Based Capital) are consolidated into the CBLR, a pure leverage ratio that is in-line with the current Tier 1 Leverage Ratio. 

In order to be considered “Well Capitalized,” the Regulatory Agencies have raised the bar significantly in establishing a 9% minimum for CBLR, which allows for far less leverage and capital management flexibility than the current capital framework (minimum Tier 1 Leverage Ratio of 5% to be considered “Well Capitalized”).  The CBLR framework does provide for a two quarter grace period if your institution falls below the 9% minimum; however, if you remain below the 9% minimum for more than two quarters or if your CBLR ratio drops below 8%, you must immediately revert to the traditional capital framework and restart the risk-weighting process. 

As your bank evaluates this new capital framework, be sure to consider the following: 

• Quantification of efficiencies gained (i.e. redirected productivity) in more streamlined reporting. 
• The likelihood that your institution may experience meaningful growth or potential credit deterioration that could pressure capital ratios. 
• How challenging would it be to resurrect the risk-weighting process if it had not been completed for an extended period of time. 

Taylor Advisors’ Take:   At this time, the CBLR framework is only advisable for banks with Tier 1 Leverage Capital well in excess of the 9% minimum threshold (i.e. greater than 11%) and no plans for material balance sheet growth.  In general, the benefits of adopting the CBLR framework may not be sufficient to offset the lack of capital management flexibility and potential challenges of having to restart the risk-weighting process.  Additionally, most banks have automated, to the extent possible, the process of risk-weighting exposures, so we do not anticipate the efficiencies gained in the streamlined reporting to be material for most institutions.  Lastly, we recommend periodically stress testing your capital base in order to quantify the potential risk of falling below the “well capitalized” minimums for each capital framework.  If you are still interested, we recommend taking your time to adopt as the final rule allows for ‘opting in’ at any point in the future.