Community bankers gathered at the Federal Reserve today to talk about the challenges facing their sector, with some proposing it is time to take another look at the community bank leverage ratio.
The one-day conference brought together policymakers and bankers for a series of presentations and panel discussions on the interplay between community banking and regulation. The Trump administration has pledged to roll back or revisit many of the regulations it blames for stifling community banking.
The day before the conference, the Treasury Department and the FDIC submitted for administrative review proposed revisions to the community bank leverage ratio framework, which was created in 2018 as an option for community banks to reduce their regulatory burden by removing the requirements for calculating and reporting risk-based capital ratios. Nearly seven years later, fewer than half of eligible community banks have adopted it, according to Fed Vice Chair for Supervision Michelle Bowman.
American Bankers Association Vice Chair Cathy Owen, who is president and CEO of State Holding Company in Little Rock, Arkansas, said many community banks declined to go with the optional CBLR in part because of timing — it was rolled out right before the COVID pandemic, so many had to focus on the immediate crisis. Another reason is that some banks are very close to dropping below the 9% leverage ratio they needed to qualify, she said.
“I’ve also had bankers tell me that their regulators have asked for the risk weighting calculations, even though they’ve chosen the CBLR, which — if they’ve chosen the CBLR and they qualify — it should be acceptable and there shouldn’t be another question as to that,” she said.
ABA board member Tom Fraser, who is president and CEO of First Mutual Holding Co. in Lakewood, Ohio, said his institution “floated too close to that 9% ratio,” which kept First Mutual from using it.
“Especially with COVID, with it hitting in ’20, we had an influx of liquidity and deposits that put a lot of pressure on that 9%,” he said. “So a quick fix would be to maybe exclude deposits that are held at the Federal Reserve, or other low-risk or hardly any risk-weighted ones.”
ABA has made several recommendations for fixing the CBLR, including urging the agencies to calibrate the ratio at 8%, simplifying the definition of capital, and eliminating redundant qualifying criteria.
