April 3, 2019
Authored by: Robert Klingler
The public comment period for the banking agencies’ capital simplification rules for qualifying community banking organizations (i.e. the Community Bank Leverage Ratio proposal) are due on Tuesday, April 9th.
As previously discussed, the regulators have proposed a new, alternative, simplified capital regime for qualifying institutions that will deem an institution to be well-capitalized so long as it maintains a leverage ratio of at least 9% and adequately capitalized so long as it maintains a leverage ratio of at least 7.5%. While initially proposed last November, publication in the Federal Register was delayed until February of this year. As a result the comment period for the rule ends on Tuesday, April 9, 2019. Comments can be submitted online through Regulations.gov.
Through the publication of this blog post, the primary comments online appear to be the appropriate threshold for the new Community Bank Leverage Ratio. As background, EGRRCPA, the statutory basis for the reforms, obligates the regulators to apply a threshold of between 8% and 10%, and the regulators proposed 9%. Most of the submitted comments, including several from community bankers, comments from the Kansas Bankers Association and the Independent Bankers Association of Texas argue for a lower 8% ratio. Conversely, the Mercatus Center has submitted a comment supporting a 10% ratio.
Another frequently commented upon topic is whether the Community Bank Leverage Ratio should a new ratio based on tangible equity, as proposed in the release, or should be the existing Tier 1 leverage ratio. The rationale is probably best expressed by the Independent Bankers Association of Texas, which noted “since community banks are already well-acquainted and familiar with the calculation of Tier 1 capital and the Tier 1 leverage ratio, creating a new, simpler leverage ratio would likely result in more burden in the form of changes to internal processes than relief provided in the form of reduced complexity.”
Are the benefits of the proposed, simpler, system sufficient to offset the transition costs of learning that new system? And perhaps more importantly, although not addressed in the existing comment letters, conceptually should the new system be based on GAAP concepts of equity or historical bank regulatory concepts of what constitutes Tier 1 capital?
Lastly, several of the commenters (including both trade associations and the Conference of State Bank Supervisors) address concerns with the proposed rule’s alternative Prompt Corrective Action framework, generally suggesting that non-compliance with the new Community Bank Leverage Ratio should require an immediate return to the existing PCA framework.