Capital Simplification Rules for Qualifying Institutions

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Andrew A. Marshall, CPA

In late November, the Federal Deposit Insurance Corporation (FDIC) issued FIL-77-2018 which discusses a notice of proposed rulemaking related to optional capital simplification rules for qualifying institutions.  With certain exceptions, the rules would be effective for financial institutions with $10 billion or less in total assets.  Highlights taken directly from FIL-77-2018 are below:

Highlights of the Notice of Proposed Rulemaking (NPR):

  • The community bank leverage ratio (CBLR) would provide material regulatory relief to qualifying community banking organizations by providing the option to calculate a simple on-balance sheet leverage ratio to measure capital adequacy. Banks using the CBLR would complete a simpler reporting schedule, which the agencies intend to propose at a later date.
  • The CBLR would be calculated as the ratio of CBLR tangible equity, as defined in the proposal, divided by average total consolidated assets.
  • A qualifying community banking organization would be defined as having less than $10 billion in total consolidated assets and with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets (qualifying criteria).
  • A qualifying community banking organization may opt into the CBLR framework if its CBLR is greater than 9 percent.
  • A banking organization that opts into the CBLR (CBLR bank), and has a CBLR greater than 9 percent, would not be subject to other capital and leverage requirements and would be considered to have met the well-capitalized ratio requirements under the prompt corrective action (PCA) framework and the generally applicable capital requirements.
  • A CBLR bank that ceases to meet any qualifying criteria in a future period would have a grace period of two reporting periods to satisfy the CBLR qualifying criteria or comply with the generally applicable capital requirements.
  • For a CBLR bank whose CBLR falls to 9 percent or less, the proposal establishes additional CBLR levels as proxies for the existing capital ratios for the adequately capitalized, undercapitalized, and significantly undercapitalized PCA capital categories.

Comments can be made regarding these proposed changes on the Federal Register website through January 18, 2019.