Spare small banks the burden of complex capital rules: FDIC chief

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Days before the Federal Deposit Insurance Corp. is set to propose a new new leverage ratio for community banks, the agency's chief said she wants to do even more to simplify capital requirements.

The FDIC's board will meet Tuesday to propose a "community bank leverage ratio," or CBLR. Under the regulatory relief law enacted in May, banks below $10 billion of assets that exceed the ratio — measuring their tangible equity to average assets — can avoid other Basel-related capital requirements if they meet certain criteria. Regulators can set the new ratio between 8% and 10%.

“The Basel III standards, which may be appropriate for internationally active banks, are unduly complex and unnecessary for community banks,” FDIC Chairman Jelena McWilliams said Friday in prepared remarks at a community bank conference hosted by the Federal Reserve Bank of Chicago. “We do not need 15 pages of regulatory reporting requirements for simple community banks to demonstrate capital adequacy. It is time to go back to basics.”

More than 5,400 of the 5,542 banks insured by the FDIC have less than $10 billion of assets and could therefore qualify for the new ratio. As part of the proposal, regulators will also seek public comment on how to define tangible equity.

But McWilliams added that she plans to “revisit the capital regime that applies to” banks that do not qualify or adopt the CBLR.

Part of that plan, she said, includes finalizing a capital simplification rule proposed by the federal regulators in September 2017 that would ease the capital treatment for mortgage servicing assets as well as certain deferred tax assets and investments.

“While the agencies have thus far delayed finalization in light of consideration of other changes to the capital regime, I see no reason to delay any further,” she said. “Finalizing the capital simplification proposal will provide certainty and clarity to community banks and take a step toward simplifying the risk-based capital rules.”

McWilliams also said she plans to work with the other regulators on how to “tailor” and simplify the risk-based capital rules for community banks.

“For example, I would like to look closely at the capital ratios and buffers community banks are subject to, and to revisit some of the more complicated calculations and risk-weightings currently required,” she said.

However, McWilliams cautioned that her capital simplification plans are "not to reduce the loss-absorbing capacity at banks.”

“The purpose is to simplify how capital ratios are calculated and reduce the compliance burden imposed on small banks that, by and large, already have more than enough capital to meet regulatory minimums,” she said. “This is true both of the CBLR and of any additional future steps to simplify the capital regime.”

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