FDIC Proposes 9 Percent Leverage Ratio as Threshold for Basel III Exemption

In a long-awaited rulemaking, the FDIC today voted to propose that community banks with a leverage capital ratio of at least 9 percent may be automatically considered in compliance with Basel III capital requirements and exempt from the complex Basel calculations. The rulemaking is mandated by the S. 2155 regulatory reform law, which directed agencies to set a community bank leverage ratio between 8 and 10 percent.

American Bankers Association President and CEO Rob Nichols described the proposal as an “important step” but said there was room to go further. “If designed as Congress intended, the community bank leverage ratio will be an optional and viable alternative to risk-based capital rules that have long been a poor fit for community banks,” he said. “Unfortunately, the 9 percent leverage ratio proposed by regulators will still leave too many well-capitalized community banks forced to follow capital rules always intended for more complex institutions. We appreciate regulators putting the proposal forward, and we look forward to working with them to improve it.”

Under the proposed rule, banks with less than $10 billion in assets would be able to elect the community bank leverage ratio framework if they meet the 9 percent ratio and if they hold 25 or less percent of assets in off-balance sheet exposures, 5 percent or less of assets in trading assets and liabilities, 25 percent or less in mortgage servicing assets and 25 percent or less in temporary difference deferred tax assets. The proposal provides details about the calculation of the community bank leverage ratio, the election process and how the agencies would handle situations when banks’ leverage ratios deteriorate and when Prompt Corrective Action is required.

The original idea to allow highly capitalized community banks to be exempt from the Basel III calculations came from an ABA and state association letter sent to regulators more than four years ago. The OCC and the Federal Reserve are expected to issue the proposal formally in the days to come. Comments are due 60 days after the proposal is published in the Federal Register. ABA is assembling a working group to comment. For more information, contact ABA’s Hugh Carney.