By Hugh Carney
When Congress created the community bank leverage ratio in 2018, it was billed as a straightforward, optional alternative to the complex Basel III risk-based capital regime. Community banks that maintained a leverage ratio above a set threshold, between 8 and 10%, would be deemed well-capitalized and in compliance with risk-based capital requirements, freeing them from the time and expense of running the complex Basel III calculations that added no supervisory value.
The concept was simple. The execution was not.
Vice Chair for Supervision Michelle Bowman’s recent speech shone a needed spotlight on the gap between the promise of the CBLR and its reality. As she put it, the CBLR is “a good example of a well-intentioned measure that underachieved in providing regulatory relief.” Her diagnosis echoes what the American Bankers Association has been saying for more than a decade: the framework, while good, must be recalibrated to deliver on Congress’s intent.
Origins: Highly capitalized bank proposal (2014–15)
ABA’s advocacy on a simpler, leverage-based capital alternative long predates the CBLR. This concept was developed against the backdrop of the agencies’ flawed Basel III proposal, which introduced significant new complexity into the risk-based capital framework without delivering commensurate supervisory or safety-and-soundness benefits. That complexity underscored the need for an alternative that would allow well-capitalized institutions to demonstrate compliance through a simpler, more transparent measure. In September 2014, ABA and state bankers association representing every state urged the banking agencies to relieve highly capitalized banks.
We proposed that these banks continue to measure assets under the simpler Basel I approach while applying Basel III definitions of capital. We defined “highly capitalized” as a common equity Tier 1 ratio of at least 14%, twice the Basel III requirement plus the full capital conservation buffer. The aim was not to lower capital levels, but to eliminate wasteful processes that yielded no benefit to supervisors or customers. Although different from what would eventually become the CBLR, this early proposal introduced the core concept: using a simple capital measure to identify banks for which the complexities of Basel III were unnecessary.
This letter sparked a series of meetings with the banking agencies to explore alternative ways to identify “highly capitalized” banks. It soon became clear that maintaining two parallel risk-based regimes, Basel I and Basel III, would only add complexity to an already complex system. The conversation began to shift toward using a GAAP-based leverage ratio as the defining measure, though some opponents pointed to an obscure provision of Dodd-Frank (the Collins Amendment) as a legal barrier.
In March 2015, after discussions with agency leaders, ABA submitted a detailed legal memorandum prepared by former Comptroller of the Currency John Dugan and others. It demonstrated that agencies had clear statutory authority, even under the Collins Amendment, to allow highly capitalized banks to meet risk-based requirements through a simple GAAP-based leverage ratio. In July 2015, ABA and an alliance of state associations again pressed regulators to act quickly, noting that banks were already expending significant resources on Basel III compliance despite capital levels “far above what Basel III requires.”
This early work laid the intellectual and legal groundwork for what Congress would later call the CBLR.
From concept to statute: Section 201 of the Economic Growth Act (2018)
ABA’s advocacy extended beyond the regulatory agencies to Capitol Hill, where we worked to build support in Congress for the concept. While preparing to interview Acting FDIC Chair Travis Hill recently, he recalled that our first meeting was when he was on the Senate Banking Committee staff and I presented the idea. Given how many advocates pass through those offices, the fact that he remembered the discussion at all speaks to the strength and clarity of the proposal.
These efforts paid off. Section 201 of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act directed the agencies to create a CBLR between 8 and 10% for qualifying community banks under $10 billion in assets. Banks above the threshold would be deemed well-capitalized and in compliance with risk-based standards.
The intent was clear: reduce unnecessary complexity for banks that already maintain more than adequate capital. The law left room for the agencies to set the ratio anywhere in the range, and to design eligibility criteria.
ABA’s 2019 recommendations: Keep it optional, calibrate at 8%
In April 2019, ABA filed a detailed comment letter supporting the CBLR proposal but recommending key changes.
First, we stressed that the CBLR must remain optional at all times. Banks should be able to opt in or out freely, without examiner pressure or procedural traps. This was essential to preserving the relief Congress intended.
Second, we urged the agencies to calibrate the ratio at 8%, the statutory minimum. Our analysis showed that every qualifying bank with an 8% CBLR already met the “well-capitalized” risk-based requirements. Setting it at 9%, we warned, would unnecessarily limit eligibility and force banks to maintain even higher operational targets (10 or 11%) to preserve a buffer.
Third, we recommended simplifying the definition of capital, eliminating redundant qualifying criteria, and tailoring the framework to avoid penalizing prudent activities like mortgage pipeline hedging.
We also flagged the coming impact of the current expected credit loss standard for loan loss accounting, which could increase capital volatility and disqualify otherwise healthy banks from CBLR eligibility.
Bowman’s assessment
Bowman’s recent remarks validate these longstanding ABA concerns. She noted that only 1,662 of the 4,022 community banks eligible in early 2025 had opted in, with adoption skewed toward smaller institutions. For banks over $1 billion in assets, the opt-in rate was just 26%.
She identified the same root causes ABA has cited: the ratio was set at 9% instead of 8%, limiting eligibility; and the framework retained restrictive capital definitions borrowed from rules for the largest institutions. Bowman urged a reassessment of whether the CBLR was “appropriately designed and calibrated to fulfill the congressional intent to achieve regulatory relief.”
Importantly, she endorsed the idea of lowering the CBLR to 8% to expand participation and increase balance sheet capacity, enabling more lending and local investment.
Why reform matters now
Community banks operate in competitive, resource-constrained environments. They serve as critical lenders to small businesses, farmers, and households in their communities. When capital is locked up unnecessarily, it constrains credit availability and economic growth, without making the banking system safer.
The CBLR was meant to be a relief valve. Instead, for too many banks, it has been a locked gate. Fixing it is not about lowering standards; it is about aligning regulatory design with economic reality and congressional intent.
Moreover, the current framework’s underperformance risks eroding support for future simplification efforts. If an optional relief tool fails to deliver, regulators may be more reluctant to pursue other targeted relief measures, whether in call reporting, liquidity rules, or other capital simplifications.
The path forward
The path forward is clear. Reforming the CBLR is both practical and necessary, and regulators have the authority to act without waiting for new legislation. By making targeted adjustments, the agencies can ensure that the framework fulfills Congress’s intent and provides real relief for community banks. Several reforms deserve immediate consideration:
- Lower the CBLR threshold to 8%. Setting the ratio at 8%, the statutory minimum, would immediately make the framework accessible to hundreds more banks while ensuring all participants remain well above well-capitalized standards. ABA estimates that roughly 500 additional banks would qualify at this level. Just as importantly, an 8% threshold would provide a sufficient buffer for banks that today hold leverage ratios above 9% but hesitate to opt in due to management or supervisory expectations for higher operating cushions. Current data show that eligible banks choosing the CBLR average a leverage ratio of 13.62%, while those opting out average 11.62%, still well above 9%. Lowering the threshold would allow more banks to use the framework with confidence, aligning regulatory design with both safety and congressional intent.
- Increase and index the $10 billion threshold to nominal GDP. The current $10 billion asset threshold for CBLR eligibility has remained static since the framework was enacted, even as the economy and banking sector have grown significantly. To maintain the framework’s relevance, the threshold should be indexed to nominal GDP, which would adjust the cap to approximately $20 billion today. Such an update would expand eligibility meaningfully, with the number of qualifying banks increasing by 51 if the threshold were raised to $20 billion. Indexing to economic growth would also prevent future erosion of eligibility and ensure that the CBLR continues to provide relief to a broad set of community banks.
- Address flaws in the capital framework that affect the CBLR. The flaws in the broader capital framework flow directly into the CBLR, limiting its effectiveness as a simpler alternative. In particular, the tier 1 leverage ratio inappropriately includes low-risk and riskless assets — such as reserves held at Federal Reserve banks, cash, and U.S. Treasury securities — in the denominator. Counting these safe assets undermines the purpose of the leverage ratio and penalizes banks for performing essential deposit-taking functions when they are most needed. At the same time, the definition of Tier 1 capital imposes harsh deductions for assets such as mortgage servicing assets, which also flow through to the CBLR since the numerator is Tier 1 capital. Revisiting both the treatment of safe assets in the denominator and regulatory deductions in the numerator would expand CBLR eligibility and ensure the framework more accurately reflects the strength of community bank capital positions.
These changes would not require new legislation; they can be implemented by the agencies under existing authority, just as ABA’s 2015 legal memorandum demonstrated for the earlier highly capitalized bank proposal.
A call to action
ABA has been working toward a workable leverage-based capital option for more than a decade. From our 2014 and 2015 letters urging relief for highly capitalized banks, to our 2019 recommendations on the CBLR, the goal has been the same: reduce unnecessary regulatory burden without compromising safety and soundness.
Bowman has made clear that the CBLR can and should be improved. The data show that too few banks use it, especially larger community banks, and the reasons why are within regulatory discretion and ability to fix. Thus, now is the time for the banking agencies to act. Lower the threshold. Simplify the framework. Deliver the relief Congress intended.
Community banks, their customers, and the communities they serve will be stronger for it.
