Executive Letter: Community Bank Leverage Ratio; Input Needed

By Rose Oswald Poels

Since banks played an instrumental role on the economic frontlines of this health crisis, it has resulted in several unintended consequences. Some of these have been positive and some may become negative. Without a doubt, banks are sitting in strong liquidity positions due in part to the stimulus that has occurred over the last year. WBA is seeking your input and testimonials regarding excess liquidity and the corresponding impact on the Community Bank Leverage Ratio (CBLR), as well as any concerns raised by regulators over the last year of a liquidity run-off.

Your feedback on the three survey questions found by clicking here will help WBA staff communicate with our congressional delegation for further relief from the CBLR in light of the unprecedented federal stimulus monies that have ballooned many community banks’ balance sheets. In addition, the information will be compiled and shared anonymously with our federal banking trade associations to help in our collective advocacy efforts on this matter. Finally, WBA will also incorporate concerns bankers may have with the regulators’ approach to excess liquidity in our regular conversations with them.

As a reminder, the CBLR framework provides a measure of capital adequacy for community banks. In 2019, the federal banking agencies issued a final rule establishing the CBLR framework, which became effective January 1, 2020. The current relief and the ratcheting schedule for the CBLR are as follows:

  • 8.5 percent, effective January 1, 2021.
  • 9 percent, effective January 1, 2022.

A bank that elects to use the CBLR framework but temporarily fails to meet all of the qualifying criteria, including the leverage ratio requirement, has a grace period of two calendar quarters to return to compliance provided that the bank maintains a leverage ratio greater than:

  • 7.5 percent, effective January 1, 2021.
  • 8 percent, effective January 1, 2022.

A bank that has a leverage ratio equal to or less than the grace period minimums must immediately apply the risk-based capital standards.

Please click here to take the survey. If you have any other input to share on this or other issues, please don’t hesitate to contact me directly. Thank you for your time and for all you are doing to continue helping your customers.