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Section 201 Rulemaking

Many banks maintain capital levels far in excess of their requirements under the Basel III risk-based capital rules. For those banks, the risk-based capital rules serve as a reporting burden, but yield no additional supervisory or safety and soundness benefits. Section 201 of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act requires all three banking regulators to issue a rule creating a “Community Bank Leverage Ratio” and setting it between 8% and 10%. 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.

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 percent. As proposed, this relief would extend to banks with less than $10 billion in assets that meet various other criteria. 

See the proposal.

ABA Position

ABA believes that the Basel III risk-based capital rules have long been a poor fit for community banks. The banking agencies have taken a step in the right direction by proposing simplifications within the parameters that Congress envisioned, but there is room for further relief. ABA supports 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 various criteria including asset size, size of off-balance sheet exposures, and mortgage servicing asset (MSA) concentrations.  ABA is concerned that the various limiting criteria may add unnecessary complexity to a proposal that seeks to simplify.
    • Issue of Concern: Limiting “qualifying community banks” to those without MSA concentrations.
Join ABA's Working Group.

​Questions? Contact ​Hugh Carney for more information.