Community Bank Leverage Ratio - Final Rule

The FDIC issued the final rule on the Community Bank Leverage Ratio (CBL Ratio) on 9/17/2019.

Here are several key items:


  • Effective in Q1 2020

  • Tier 1 Leverage Ratio must be greater than 9 percent

  • Community banks must have less than $10 billion in total assets

  • Must have limited amounts of off-balance-sheet exposures

A Community Bank that opts-in will not be required to report or calculate risk-based capital.

A Community Bank may opt-out at a later date, but would be required to start reporting and calculating risk-based capital again.

The links to the FDIC announcements are here:

The FDIC has indicated that it will issue an implementation guide in the near future to further clarify this optional capital framework.

As the chart above indicates, most Community Banks are holding capital above the minimum required Tier 1 Leverage Ratio of 9 percent required under the CBL Ratio capital framework.

Therefore, most Community Banks will have a decision to make: opt-in for the CBL Ratio framework or continue to use the risk-based capital framework that you have been using for more than a decade.

There is a cost or loss of income as the chart above very roughly lays out. In this chart, the opportunity cost is the lost R.O.A. on the balance sheet expansion associated with a 9% Tier 1 Leverage Ratio compared to an 11% Tier 1 Leverage Ratio. For a $25 million Community Bank that is lost income of $83 thousand - lower Total Assets of $5.5 million times pre-tax R.O.A. of 1.5%. There is also an impact on capital and dividend management.

There are several questions or issues for consideration as you move forward with your decision on whether to elect to implement the new CBL Ratio framework:

  1. What do you calculate as the cost burden of complying with the current risk-based capital rules?

  2. Will you need any of the excess levels of capital (i.e., above current capital rule requirements) in the future for balance sheet growth, acquisitions or returning capital to shareholders?

  3. How difficult or costly will it be to opt back out of the CBL Ratio capital framework and restart the risk-based capital framework at a later date?

Take some time to assess these questions and issues. Some Community Banks will conclude that this new CBL Ratio framework is a reasonable approach, you do not need the extra capital and will elect to opt-in. Other Community Banks will conclude that this new framework is not appropriate given their view of balance sheet growth, acquisitions and capital and dividend management issues that they may face in the future and will elect not to opt-in.

There are trade-offs and it is important to evaluate the best course for your bank.

Good luck!