Tuesday, December 1, 2020

Community bank leverage ratio draws concern; comment letter filed

Section 201 of S. 2155 requires Congress to establish a leverage ratio between 8 and 10 percent for qualifying traditional community bank operations below $10 billion in assets. Its purpose – and what we’ve argued for some time – is to create an exemption for these smaller banks from the dreadful Basel III rules, rules that were never intended to apply to these banks.

Long before the bill was passed last year, the OBA and its colleagues worked closely with the American Bankers Association and the ICBA to make the case that the proposed rules under Basel III were intended primarily for large, money center banks. The proposed rules are far too complex and have no connection to how this community bank model works in practice.

“Section 201 (of S. 2155) contains the language that most of us really did the trick in exempting our traditional community banks from Basel III,” OBA President and CEO Roger Beverage said. “The regulators were required to come up with something to provide material and significant regulatory relief for our state’s small banks.

“The proposal on which our comments were filed included an ‘option’ to calculate a very simple (leverage) ratio on a relatively simple calculation in order to demonstrate the bank is adequately capitalized. The whole process was intended to create simpler reporting requirements and yet still be able to demonstrate the bank has sufficient capital that’s “adequate” and, thus, meets the “well-capitalized” ratio requirements within the “prompt corrective action” framework.

“But, as I said last year when the bill passed, one of our goals was to exempt the vast majority of member banks from the onerous and unnecessarily complex regulatory scheme that is Basel III.”

The OBA’s comment letter can be viewed by clicking here.

The OBA’s letter proposes an 8 percent ratio as adequate for qualifying banks. While our members see this as a positive first step by actually creating meaningful regulatory relief, more needs to be done. There are still unanswered questions pending, like how the prompt corrective action framework is going to work for banks that fall below CBLR thresholds.

In related news, Senate Banking Committee Chairman Mike Crapo (R-Idaho) and Sen. Jerry Moran (R-Kansas) sent a letter urging the agencies to set the CBLR at 8 percent for banks with total assets under $10 billion. Crapo and Moran pointed out this is “well above the current Tier 1 leverage requirement for well-capitalized banks.” They added that setting the CBLR at 8 percent would “result in banks receiving relief while maintaining significant capital.”