On April 6, 2020, the FDIC released FIL 35-2020, introducing changes to the Community Bank Leverage Ratio ("CBLR") in response to COVID-19. Starting in 2020, the CBLR will determine if a bank is considered well-capitalized by looking at the leverage ratio of the bank. If your bank is considered well-capitalized, it will be subjected to less regulatory reporting requirements in Schedule RC-R of the Call Report.
Who does this impact?
Federal agencies expect this guidance to impact the majority of community banks, so awareness of the new regulation is important. Community banks are defined as any depository institution or depository institution holding company that has less than $10 billion in consolidated assets, an off-balance-sheet exposure of 25.0% or less of total consolidated assets, and trading assets and liabilities of 5.0% or less of total consolidated assets.
What is the new "well-capitalized" definition?
Under this guidance, there is a gradual transition from an initial leverage ratio of 8.0% to an eventual 9.0% minimum to qualify as being well-capitalized under the final rule. The temporary 8.0% leverage ratio minimum applies from the second quarter of 2020 until the end of the year. This increases to 8.5% for all of 2021, and then 9.0% starting in the first quarter of 2022 moving forward.
What if my bank falls below this threshold?
There is a two-quarter grace period to boost the ratio back up to the required level. However, you can't fall too far below - only within one percentage point (7.0% for June through December 2020; 7.5% for 2021; and 8.0% for 2022 and beyond). If a bank fails to raise the ratio back above the threshold within two quarters, or falls below a percentage point of the limit, the bank will be required to comply with the generally applicable rule and file appropriate regulatory reports (i.e., RC-R, Part II).
Most community banks should take note: It is estimated that 95% of qualifying community banks will meet the 8.0% limit in 2020, and 91% will meet the 8.5% limit in 2021. Therefore, if you are a community bank, this is likely good news!
What about the Call Report?
Qualifying community banks with a leverage ratio over 9.0% as of March 31, 2020 have the option to opt into the CBLR. If not, the 8.0% minimum kicks in for the June 30, 2020 filing. It is advantageous for qualifying banks to opt in. If you fear that your bank will slip below the minimum in the future, remember that the bank will have a grace period of two quarters. Opting in allows a bank to bypass RC-R, Part II (along with the time and headaches that accompany it). So, for small community banks with limited staff, it is worth the effort to determine whether the leverage ratio is over the limit and, if it is, opt into the CBLR.
It's important to remember that the changes to the CBLR take effect for the second quarter of 2020, so the 9.0% well-capitalized threshold applies for the March 2020 filing. Banks should take a closer look at their leverage ratios to see if they can opt in for March (and remember, you will be given a 30-day grace period from the usual reporting deadline due to COVID-19). If not, it's expected that most community banks will qualify for the 8.0% threshold for the June filing. However, it's important to remember that the ratio threshold will gradually increase to 9.0%, so management should keep a close eye on that leverage ratio. Nevertheless, as opting into the CBLR means less time filling out Schedule RC-R, it is certainly worth the effort to qualify as being well-capitalized.
To learn about acxell’s Internal Audit and Risk Management Services and how we can help your institution, email WhatsYourRisk@acxellrms.com or call 877-651-1700.
Mike McIntyre, CPA
Manager, Financial/Treasury Audit Team
Mike McIntyre has been an integral part of the Firm’s Financial/Treasury Audit Team since 2015. He specializes in managing and conducting audits related to accounting, investment portfolio management, fixed assets, regulatory reporting, bank reconciliations, accounts payable, and other financial areas. He reviews policies and procedures, for adequacy and compliance with regulatory requirements. Prior to joining acxell, Mr. McIntyre worked at a New Jersey based financial institution for 11 years. He began his career in banking in 2002. A Certified Public Accountant (CPA) in the State of New Jersey, Mr. McIntyre earned his master’s degree in Taxation from Florida Atlantic University and his bachelor’s degree in Communications from West Chester University of Pennsylvania.