Page 1 - §201 Capital Simplification for Banks <$10B

Monday, December 10, 2018

Below are a few updates on various federal regulatory issues. Bankers need to be
involved with many of these so please scan these updates to spot where you should
submit comment letters or take other steps within your bank.

§201 Capital Simplification for Banks <$10B. Many banks maintain capital levels far
in excess of their requirements under the Basel III risk-based capital rules; these rules
serve as a reporting burden, but yield no additional supervisory or safety and
soundness benefits. Section 201 of the recently enacted S.2155 requires all three
banking regulators to issue a rule creating a “Community Bank Leverage Ratio.” S.2155
specifies it is to be between 8% and 10% for banks with less than $10 billion in assets.
On November 20, 2018, the banking agencies issued a proposal to treat banks as “well
capitalized” if they hold a Community Bank Leverage Ratio of greater than 9%. See the
proposal.

CBA believes 8% is the appropriate number and will urge that. The proposal is to be
open for comment for 60 days after publication in the Federal Register next week. State
bankers associations nationwide and ABA are comment letters on this issue. When
CBA chaired ABA’s Regulatory Relief Task Force in 2014 we had numerous
discussions with the concept’s leading proponent, then FDIC Vice-Chairman Tom
Hoenig, including in Denver to argue for 8% or lower.

The Basel III risk-based capital rules are a poor fit for community banks. If a community
bank is above that ratio, they will be deemed in compliance with risk-based capital
requirements, such as Basel III. In enacting Section 201, Congress recognized that it is
superfluous for a bank with high levels of capital to go through the complex risk-based
calculations if the results do nothing more than confirm that the bank has sufficient
capital.

ABA and CBA support a simple, optional and accessible community bank leverage ratio
that can meaningfully reduce regulatory burden at qualifying institutions by creating an
exception to the current risk-based capital standards and any future amendments to
these standards. We believe the regulators should:
• Recognize that an 8% threshold is appropriate. Data shows that banks with 8% capital
clearly meet – in fact exceed – the various risk-based capital requirements. In effect
this proves the premise on which the provision in law was based and shows that an
8% threshold meets the purpose of the law. Any exceptions can be dealt with through
the supervisory process.
• Ensure that the Community Bank Leverage Ratio remains optional. The Community
Bank Leverage Ratio must remain optional and not be converted into a new – higher –
minimum capital standard for community banks.
• Ensure that the Community Bank Leverage Ratio remains simple. The proposal limits
the institutions that qualify the Community Bank Leverage Ratio election through