Bank Regulators Issue Rules on CARES Act Community Bank Leverage Ratio Relief
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was issued expeditiously to provide much needed relief to individual Americans, health care workers, small businesses and industries hit hard by COVID-19. Federal agencies and regulators are quickly responding with additional clarifications and guidance to help ensure the CARES Act is working as intended.
On April 6, 2020, the FDIC, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency issued two interim final rules that make changes to the community bank leverage ratio (CBLR) framework and implement Section 4012 of the CARES Act. The CARES Act relief expires at the earlier of the expiration of the national emergency declaration or December 31, 2020, and the second interim final rule provides a graduated transition through 2022 back to current CBLR levels.
These rules are effective once published in the Federal Register. Banking organizations can take advantage of this relief in their call reports or Form FR Y-9C as of June 30, 2020.
In 2018, Congress directed the federal agencies to develop a CBLR framework to provide qualifying community banks relief from risk-based capital rules while helping to ensure adequate capital reserves. The optional CBLR framework became effective on January 1, 2020. The rules established a CBLR of 9 percent using the capital rule’s existing leverage ratio, i.e., Tier 1 capital divided by average total consolidated assets. A qualifying community banking organization that maintains a leverage ratio of greater than 9 percent and elects to use the CBLR framework will be considered to have satisfied the generally applicable rule and any other applicable capital or leverage requirements and would be considered well capitalized. The rules also established a two-quarter grace period during which a bank that temporarily fails to meet any of the qualifying criteria, including the greater-than-9-percent leverage ratio requirement, generally would still be considered well capitalized so long as the banking organization maintains a leverage ratio of greater than 8 percent.
The first interim final rule implements §4012 of the CARES Act and provides that, as of the second quarter of 2020, a banking organization with a leverage ratio of 8 percent or greater (and that meets the other existing qualifying criteria) may elect to use the CBLR framework. The interim final rule also establishes a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls below the 8-percent CBLR requirement, so long as the banking organization maintains a leverage ratio of 7 percent or greater.
The second interim final rule provides a transition from the temporary 8-percent CBLR requirement under the CARES Act back to the 9-percent CBLR requirement as follows:
- Second through fourth quarters 2020 – the CBLR requirement will be greater than 8 percent
- Calendar year 2021 – the CBLR requirement will be greater than 8.5 percent
- 2022 – the CBLR requirement will be greater than 9 percent
The transition interim final rule also maintains a two-quarter grace period for a bank whose leverage ratio falls no more than 100 basis points below the applicable CBLR requirement.
BKD will continue to follow this developing situation. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. Visit BKD’s COVID-19 Resource Center to learn more. If you have questions, contact your BKD Trusted Advisor™ today.