FDIC tries to ease small banks' concerns with capital rule revamp

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WASHINGTON — On the surface, federal regulators stuck to their guns in finalizing a simplified capital measure for community banks, but on closer inspection the new rule appears aimed at trying to ease industry concerns about the 2018 proposal.

The Federal Deposit Insurance Corp.'s board approved a plan Tuesday establishing a "community bank leverage ratio" of 9%, the same level as in the proposal. While banks had called for a lower number, the final rule revamped how the ratio is calculated.

Rather than create a whole new calculation, the new regulation would use Tier 1 capital — a well-established standard in general capital rules — as the numerator. The proposal, meant to create an optional alternative for community banks to risk-based capital requirements, had defined the numerator as "tangible equity capital."

"The use of Tier 1 capital for the numerator of this leverage ratio would reduce complexities that would have been created with the proposed introduction of a new definition of capital into the CBLR framework," according to an FDIC staff memo.

The FDIC board voted unanimously for the final rule. The other federal bank regulatory agencies are expected to follow course soon.

"One of the great strengths of the United States financial system is its diversity of institutions. We have thousands of banks of different sizes and business models," FDIC Chairman Jelena McWilliams said at the board meeting. "The overwhelming majority of these banks are small. ... It is important that the regulatory framework applied to our community banks is commensurate with this reality."

In addition to redefining the new ratio, the regulators also strengthened a grace period for banks that fail to meet the new benchmark. If a bank's leverage ratio falls below 9% but stays above 8%, the institution would still be considered well capitalized for two quarters under the "prompt corrective action" framework.

The rule is slated to go into effect Jan. 1. According to the FDIC, approximately 85% of the nation's deposit insured banks with less than $10 billion in assets will qualify to opt in to the CBLR framework.

Martin Gruenberg, the former FDIC chairman who still sits on the board, called the final rule “a win-win.”

“This approach rewards qualifying banks that choose to opt into the rule for having strong leverage capital, and provides an incentive for banks that don’t qualify to strengthen their capital,” he said.

The November proposal had been greeted with criticism by community banks as well as state regulators. The industry urged regulators to set the new ratio at 8%, the minimum allowed under the regulatory relief law enacted by Congress last year. Meanwhile, some worried the proposal could subject banks failing to meet the CBLR to "prompt corrective action" procedures, which are meant for troubled institutions.

Industry reactions to the final plan unveiled Tuesday were mixed.

The American Bankers Association welcomed the changes in the final but signaled that community banks would still prefer an 8% leverage ratio.

“We applaud the FDIC for approving a Community Bank Leverage Ratio that recognizes the fact that the vast majority of community banks already meet or exceed risk-based capital requirements,” ABA chief executive Rob Nichols said in a press release. “We hope that as the FDIC becomes more comfortable with the CBLR, it will reassess this rule and allow community banks with ample capital to use an 8 percent ratio.”

The Independent Community Bankers of America was blunter in its assessment. “We’re disappointed,” said Chris Cole, executive vice president and senior regulatory counsel at ICBA. “We wanted 8%, which would have included 500 to 600 more banks. We would have liked to see more banks to able eligible to use it.”

Cole said the ICBA's members will have "mixed feelings" about the shift to Tier 1 capital.

“Tier 1 is still a risk-based measurement. While it’s familiar for our banks, it’s still risk-based, and we thought tangible equity would be a more flexible definition,” he said.

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Regulatory relief Regulatory reform Minimum capital requirements Community banking Jelena McWilliams FDIC