What is the Community Bank Leverage Ratio (CBLR)?
On September 17, 2019, the banking regulators issued the “Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations.” This new capital rule is designed to reduce the burden of reporting risk-based capital ratios by providing a simple measure for capital adequacy. The CBLR is effective on January 1, 2020, and Qualified Community Banking Organizations may opt in with an election on the March 31, 2020, call report.
How does an institution qualify for the CBLR Framework?
In order to be considered a Qualified Community Banking Organization for the new capital rule, banking institutions must meet the following criteria:
A qualified community banking organization may opt in or out of the CBLR each time it completes the call report by making the appropriate election and thereby completing the associated reporting requirements corresponding with their election.
What if our institution adopts the CBLR but subsequently fails to meet the criteria above?
The final rule allows for a “grace period” for qualifying organizations that fail to satisfy one or more of the qualifying criteria listed above but continue to maintain a leverage ratio of 8% or higher. This grace period provides up to two quarters during which the qualified organization can continue to utilize the CBLR framework and be considered “well capitalized” for regulatory reporting purposes. After two quarters, a qualifying organization will be required to complete the relevant risk-based capital reporting framework if the organization (1) is unable to restore compliance with all qualifying criteria (including reporting a leverage ratio in excess of 9%) or (2) has a leverage ratio of 8% or less.
It should be noted that the grace period is not applicable to qualifying organizations that fail to meet qualifying criteria due to a merger or acquisition.
Should our institution adopt the CBLR framework?
As with many decisions, it depends. The decision is largely dependent upon the individual institution, strategic and capital plans, staffing over the call report process and overall growth objectives. As your institution approaches the March 31, 2020, call report filing date, some of the following topics would be worthy of consideration among board and senior management teams.
Fortunately, the final rule allows banks to opt in and out of the CBLR framework with each call report filed, so the initial decision isn’t final. With that said, there is still time for strategic discussions around the topics above as well as any institution-specific considerations that may be relevant to help you make a well-informed decision by March 31.
It is important to take these necessary steps noted above, and the time to start is right now. Please contact your Eide Bailly professional if you need assistance with the new CBLR framework.