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Regulators offer community banks relief, but not all will bite

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Regulators offer community banks relief, but not all will bite

A new regulatory proposal in the Dodd-Frank revision bill would give community banks the option to only report one leverage ratio, rather than the current four measures of capital adequacy. However, banks close to $10 billion in assets or on the edge of the ratio requirement may turn down the opportunity to simplify their reporting.

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Federal banking regulators jointly proposed the new community bank leverage ratio, or CBLR, in November. Under the proposal — which is still in the comment phase — banks with less than $10 billion in assets, limited amounts of certain assets and off-balance sheet exposures and a community bank leverage ratio over 9% would have the option to report just one ratio. These banks would no longer be subject to the risk-based capital ratios and the tier 1 leverage ratio and would be considered "well-capitalized" under the regulatory prompt corrective action statute, potentially saving them significant time calculating risk-weighted ratios.

Banks that meet these criteria could choose to stick with the current reporting requirements. They could also test the CBLR and later switch back to the old framework.

Banks with a CBLR between 7.5% and 9% would be considered "adequately capitalized," while those with a ratio below 7.5% would fall into the "undercapitalized" or "significantly undercapitalized" categories. Community banks are currently tracking above the required ratio. As of Sept. 30, 2018, the median estimated or implied CBLR for all community banks was 10.91%, higher than the group's actual tier 1 leverage ratio of 10.88%.

Regulators have several criteria for determining which banks are eligible for the CBLR, but for the purposes of this analysis S&P Global Market Intelligence examined all banks with less than $10 billion in assets at Sept. 30. The analysis found 723 banks that would not qualify for the CBLR because their ratio would be below 9%. That represents about 13% of community banks nationwide.

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Banks that qualify for the CBLR may choose to stick to the old ratio because of asset requirements, internal guidelines or pressure from regulators to maintain an informal buffer. There is also a potential that banks deemed "well capitalized" under the current more onerous system could be considered just "adequately capitalized" under the simplified regime.

Christopher Cole, executive vice president and senior regulatory counsel at the Independent Community Bankers of America, said that regulators often expect an informal "buffer" between the required ratio and a bank's actual ratio. According to Cole, this may prevent banks with a CBLR ranging from 9% to 10% from switching to the simpler ratio. S&P Global Market Intelligence data shows that 1,019 community banks reported a ratio in the 9% to 10% range in the third quarter.

Mark Kochvar said even without a buffer from regulators, most banks will have an internal guideline higher than 9%. Kochvar is CFO at Indiana, Pa.-based S&T Bank, which had $7.09 billion in assets at Sept. 30. He said S&T approaching the $10 billion threshold is the main reason the bank will not change to the CBLR.

"The risk-weighted calculations are relatively complex. ... I think they'd be difficult to restart," Kochvar said.

Kochvar does not expect many banks over $5 billion in assets to take advantage of the CBLR. There were 80 banks with between $5 billion and $10 billion in assets at Sept. 30, 2018.

Although banks are not required to return to risk-based ratios if their CBLR drops below 9%, Cole said some institutions that opt in to the CBLR may opt back out if they can maintain a higher status under risk-based ratios.

There are 20 community banks considered "undercapitalized" using the current ratios. Curtis, Neb.-based Western Nebraska Bank has an implied CBLR of 8.39%, putting it close to qualifying for the new framework. No other banks are within 100 basis points of the required ratio.

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ICBA wants regulators to lower the proposed ratio to 8%, which would mean about 95% of community banks could participate, according to Cole. "It would mean a wider expansion of its use," he said. "The whole point of doing this is to provide community banks a way to get out of having to comply with the Basel III capital requirements."

Cole said overall, community banks seem to be excited for the opportunity, but regulators may consider resetting the ratio if not enough banks participate. "[If] 85% of [banks] are eligible, but only 40% to 50% are opting in, there's something wrong," he said, noting that regulators have expressed openness to resetting the ratio. "They would take a second look at it if it turns out that 9% looks too high."

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Banks and thrifts report regulatory capital information in schedule RC-R of the call report.