Pub. 14 2019-2020 Issue 4

NEBRASKA BANKERS ASSOCIATION 15 Counselor’s Corner — continued on page 16 The CBLR banking organization would be required to comply with the generally applicable capital rules if it were unable to comply with all quali- fying CBLR criteria by the end of the two-quarter grace period, if its lever- age ratio fell below 8% at any time, or if it no longer satisfied the qualifying criteria due to the consummation of a merger or acquisition. running them. 2 Overview of CBLR Section 201 of EGRRCPA requires the agencies to establish a new CBLR of 8% to 10% for qualifying banking organizations. Under the CBLR rule, depository institutions and depository institution holding companies that maintain a leverage ratio of 9% or greater and meet certain other criteria would be consid- ered “qualifying community banking organizations” 3 eligible to use the CBLR framework. A qualifying community banking organization that elects to use the CBLR framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well-capitalized ratio requirements for purposes of the agencies’ PCA framework. The CBLR rule includes a two-quarter grace period that will generally allow a CBLR banking organization that is an insured depository institution to be considered well-capitalized for PCA purposes if it does not satisfy the qualifying criteria, but its leverage ratio remains greater than 8%. The CBLR banking organization would be required to comply with the generally applicable capital rules if it were unable to comply with all quali- fying CBLR criteria by the end of the two-quarter grace period, if its leverage ratio fell below 8% at any time, or if it no longer satisfied the qualifying criteria due to the consummation of a merger or acquisition. Under the CBLR rule, a qualifying community banking or- ganization electing to use the CBLR framework is required to calculate its leverage ratio taking into account the modifications made by the capital simplification rule and the current expected credit losses methodology (“CECL”) transitions final rule. 4 The CBLR rule will be effective as of January 1, 2020, to align with the revised effective date for the capital simplification final rule. 5 Banking organizations may utilize the CBLR framework for purposes of their Call Report or Form FR Y-9C for the first quarter of 2020. FDIC Chairman Jelena McWilliams called the CBLR rule “an important step in the simplification and tailoring of our regulatory framework” that will allow “community banks to significantly reduce the regulatory reporting associated with capital adequacy on the Call Report.” 6 The agencies estimate that approximately 85% of community banks will qualify for the CBLR framework. 7 Takeaways The CBLR promises simplicity through the use of a single ratio tomeasure capital adequacy, with the final rule establishing the desired capital target above 9%, halfway between the range suggested by EGRRCPA of 8 to 10%. While possibly disappoint- ing that the level was not set lower, most community banks are likely to find the finalized CBLR amuch easier system for tracking capital than PCA. Although not discussed in the CBLR rule, one of the more significant impacts of the CBLR framework would be the elimination of risk weighting of the bank assets. Most banks that exceed a 9% CBLR would also likely exceed the vari- ous risk-weighted capital ratios, but the elimination of the need to calculate those ratios would still be a welcome relief. Other important takeaways from the final CBLR rule: 1. Optional Framework. The CBLR framework is an optional framework designed to reduce burden by removing the requirements for calculating and report- ing risk-based capital ratios for qualifying community banking organizations opting into the framework. A qualifying community banking organization becomes subject to the CBLR framework when it makes an election. A banking organization may opt-out of the