Pub. 14 2019-2020 Issue 4

WWW.NEBANKERS.ORG 14 COUNSELOR’S CORNER Community Bank Leverage Ratio: Finally, Something Simple (?) Jeff Makovicka, Kutak Rock LLP O VER THE YEARS, BANKING HAS CHANGED. SOME OF THESE changes are benign, such as economies of scale, tech- nological innovation and the removal of branching restrictions since the late 1970s. One of the strongest trends in banking since 1970, however, is the steady increase in complexity and regulation. According to the Mercatus Center, the number of regulatorymandates related to credit intermedia- tion quadrupled between 1970 and 2010, from around 10,000 to just over 40,000. 1 That, of course, was before the passage of Dodd-Frank, which on its own added more than 27,000 new restrictions to the rulebook, making it “one of the biggest regu- latory events ever.” Recently, however, Congress did try to simplify banking a bit. Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA) contains a framework for capital rule simplification applicable to qualify- ing community banking organizations called the Community Bank Leverage Ratio, or CBLR. Historically, or at least since 1991, when the FDIC Improvement Act was passed, the adequacy of bank capital has been judged based on a complicated series of ratios and formulas known as the Prompt Corrective Action (PCA) framework. Under the PCA framework, a bank considers the elements comprising capital as well as the riskiness of the assets it supports by calculating Tier 1 Leverage Ratios, Total Risk Based Capital Ratios, and Tier 1 Risk Based Capital Ratios to determine whether the bank is well or adequately capitalized. In 2013, implementation of Basel III in the United States was added to capital requirements, with its concept of common equity tier 1 capital and the new capital buffer, further complicating the task of a small-town community bank that simply accepts deposits and makes loans. In September and October, the federal banking agencies (the agencies) finalized the regulations implementing Section 201 of EGRRCPA (the CBLR rule), hoping to make life a little easier and simpler for community banks and the bankers charged with