McWilliams: Most Community Banks Will See Relief Under Leverage Ratio Proposal

An estimated 80 percent of community banks will be exempt from complex risk-based capital under the yet-to-be-announced community bank leverage ratio, FDIC Chairman Jelena McWilliams said at a community banking symposium hosted by the Federal Reserve Bank of Chicago today. Her remarks came in advance of the FDIC board vote on the proposal, which is scheduled for Tuesday.

Under the proposal — which is a mandatory rulemaking in the S. 2155 regulatory reform bill and which originated in a recommendation several years ago from ABA and the state bankers associations — qualifying banks with less than $10 billion that meet “a simple ratio of tangible equity to total assets” will be exempt from the existing Basel III framework, McWilliams said. She added that under the proposal, banks will need to satisfy certain activity-related criteria, and that “a simple leverage ratio makes sense for traditional business models.”

While the majority of community banks will be able to take advantage of the exemption, McWilliams said that regulators will also continue working to simplify the existing capital framework for community banks that choose not to adopt the leverage ratio or do not qualify for it. This would include finalizing a capital simplification issued last year that would make changes to the capital treatment for mortgage servicing assets, certain deferred tax assets, and investments in unconsolidated financial institutions, she said.

“Let me emphasize that the purpose of this exercise is not to reduce the loss-absorbing capacity at banks,” McWilliams said. “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.”