# FDIC FIL-11-2020: Regulatory Reporting Revisions to the Consolidated Reports of Condition and Income (Call Report) and the FFIEC 101 Report

> Federal · Agency guidance · Superseded

URL: https://www.frixlaw.com/law-library/statutes/FDIC_FIL20011

## Section

- **Citation:** FDIC FIL-11-2020
- **Heading:** Regulatory Reporting Revisions to the Consolidated Reports of Condition and Income (Call Report) and the FFIEC 101 Report
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** Superseded
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** FDIC Financial Institution Letters / Regulatory Reporting Revisions to the Consolidated Reports of Condition and Income (Call Report) and the FFIEC 101 Report

## Text

61776
Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations
1 84 FR 3062 (February 8, 2019).
DEPARTMENT OF TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 1, 3, 5, 6, 23, 24, 32, 34,
160, and 192
[Docket ID OCC–2018–0040]
RIN 1557–AE59
FEDERAL RESERVE SYSTEM
12 CFR Parts 206, 208, 211, 215, 217,
223, 225, 238, and 251
[Regulation Q; Docket No. R–1638]
RIN 7100–AF 29
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 303, 324, 337, 347, 362,
365, and 390
RIN 3064–AE91
Regulatory Capital Rule: Capital
Simplification for Qualifying
Community Banking Organizations
AGENCY: Office of the Comptroller of the
Currency, Treasury; the Board of
Governors of the Federal Reserve
System; and the Federal Deposit
Insurance Corporation.
ACTION: Final rule.
SUMMARY: The Office of the Comptroller
of the Currency, the Board of Governors
of the Federal Reserve System, and the
Federal Deposit Insurance Corporation
(collectively, the agencies) are adopting
a final rule that provides for a simple
measure of capital adequacy for certain
community banking organizations,
consistent with section 201 of the
Economic Growth, Regulatory Relief,
and Consumer Protection Act (final
rule). Under the final rule, depository
institutions and depository institution
holding companies that have less than
$10 billion in total consolidated assets
and meet other qualifying criteria,
including a leverage ratio (equal to tier
1 capital divided by average total
consolidated assets) of greater than 9
percent, will be eligible to opt into the
community bank leverage ratio
framework (qualifying community
banking organizations)
tions and depository institution
holding companies that have less than
$10 billion in total consolidated assets
and meet other qualifying criteria,
including a leverage ratio (equal to tier
1 capital divided by average total
consolidated assets) of greater than 9
percent, will be eligible to opt into the
community bank leverage ratio
framework (qualifying community
banking organizations). Qualifying
community banking organizations that
elect to use the community bank
leverage ratio framework and that
maintain a leverage ratio of greater than
9 percent will be considered to have
satisfied the generally applicable risk-
based and leverage capital requirements
in the agencies’ capital rules (generally
applicable rule) and, if applicable, will
be considered to have met the well-
capitalized ratio requirements for
purposes of section 38 of the Federal
Deposit Insurance Act. The final rule
includes a two-quarter grace period
during which a qualifying community
banking organization that temporarily
fails to meet any of the qualifying
criteria, including the greater than 9
percent leverage ratio requirement,
generally would still be deemed well-
capitalized so long as the banking
organization maintains a leverage ratio
greater than 8 percent. At the end of the
grace period, the banking organization
must meet all qualifying criteria to
remain in the community bank leverage
ratio framework or otherwise must
comply with and report under the
generally applicable rule. Similarly, a
banking organization that fails to
maintain a leverage ratio greater than 8
percent would not be permitted to use
the grace period and must comply with
the capital rule’s generally applicable
requirements and file the appropriate
regulatory reports.
DATES: The final rule is effective on
January 1, 2020
herwise must
comply with and report under the
generally applicable rule. Similarly, a
banking organization that fails to
maintain a leverage ratio greater than 8
percent would not be permitted to use
the grace period and must comply with
the capital rule’s generally applicable
requirements and file the appropriate
regulatory reports.
DATES: The final rule is effective on
January 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: David Elkes, Risk Expert,
Benjamin Pegg, Risk Expert, or Jung Sup
Kim, Risk Specialist, Capital and
Regulatory Policy (202) 649–6370; or
Carl Kaminski, Special Counsel, or
Daniel Perez, Senior Attorney, or Rima
Kundnani, Senior Attorney, Chief
Counsel’s Office, (202) 649–5490, for
persons who are deaf or hearing
impaired, TTY, (202) 649–5597, Office
of the Comptroller of the Currency, 400
7th Street SW, Washington, DC 20219.
Board: Constance M. Horsley, Deputy
Associate Director, (202) 452–5239; Juan
Climent, Manager, (202) 872–7526;
Andrew Willis, Lead Financial
Institutions Policy Analyst, (202) 912–
4323, or Christopher Appel, Senior
Financial Institutions Policy Analyst II,
(202) 973–6862, Division of Supervision
and Regulation; or Mark Buresh, Senior
Counsel, (202) 452–270; or Andrew
Hartlage, Counsel, (202) 452–6483,
Legal Division, Board of Governors of
the Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Benedetto Bosco, Chief, Capital
Policy Section, bbosco@fdic.gov;
Stephanie Lorek, Senior Capital Markets
Policy Analyst, slorek@fdic.gov; Dushan
Gorechan, Financial Analyst,
dgorechan@fdic.gov; Kyle McCormick,
Financial Analyst, kmccormick@
fdic.gov; Capital Markets Branch,
Division of Risk Management
Supervision, regulatorycapital@fdic.gov,
ice for the Deaf
(TDD), (202) 263–4869.
FDIC: Benedetto Bosco, Chief, Capital
Policy Section, bbosco@fdic.gov;
Stephanie Lorek, Senior Capital Markets
Policy Analyst, slorek@fdic.gov; Dushan
Gorechan, Financial Analyst,
dgorechan@fdic.gov; Kyle McCormick,
Financial Analyst, kmccormick@
fdic.gov; Capital Markets Branch,
Division of Risk Management
Supervision, regulatorycapital@fdic.gov,
(202) 898–6888; or Michael Phillips,
Counsel, mphillips@fdic.gov;
Supervision Branch, Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC
20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Summary of the Final Rule
II. Proposed Rule
A. Proposed Community Bank Leverage
Ratio Framework
B. Summary of Comments
III. Final Rule
A. Qualifying Criteria for the Community
Bank Leverage Ratio Framework
1. Leverage Ratio of Greater Than 9 Percent
2. Total Consolidated Assets
3. Total Off-Balance Sheet Exposures
4. Total Trading Assets and Trading
Liabilities
5. Advanced Approaches Banking
Organizations
B. Definition of the Leverage Ratio’s
Numerator and Denominator
1. Numerator
2. Denominator
C. Calibration of the Leverage Ratio in
Order To Qualify for the Community
Bank Leverage Ratio
D. Ability To Opt Into and Out of the
Community Bank Leverage Ratio
Framework
E. Ongoing Compliance With the
Community Bank Leverage Ratio
Framework
1. Meeting the Definition of a Qualifying
Community Banking Organization
2. Treatment of a Community Banking
Organization That Falls Below Certain
Leverage Ratio Levels
F. FDIC Deposit Insurance Assessments
Regulations
G. Other Affected Regulations
H. Effective Date of the Final Rule
IV. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of
1995
E. Riegle Community Development and
Regulatory Improvement Act of 1994
F. The Congressional Review Act
I. Introduction
A
evels
F. FDIC Deposit Insurance Assessments
Regulations
G. Other Affected Regulations
H. Effective Date of the Final Rule
IV. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of
1995
E. Riegle Community Development and
Regulatory Improvement Act of 1994
F. The Congressional Review Act
I. Introduction
A. Background
On February 8, 2019, the Office of the
Comptroller of the Currency (OCC), the
Board of Governors of the Federal
Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC)
(collectively, the agencies) published a
notice of proposed rulemaking (the
proposed rule or proposal) 1 to
implement section 201 of the Economic
Growth, Regulatory Relief, and
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2 The agencies note that, under existing PCA
requirements applicable to insured depository
institutions, to be considered ‘‘well capitalized’’ a
banking organization must demonstrate that it is not
subject to any written agreement, order, capital
directive, or as applicable, prompt corrective action
directive, to meet and maintain a specific capital
level for any capital measure. See 12 CFR
6.4(b)(1)(iv) (OCC); 12 CFR 208.43(b)(1)(v) (Board);
12 CFR 324.403(b)(1)(v) (FDIC). The same legal
requirements would continue to apply under the
community bank leverage ratio framework.
3 Under the final rule, a qualifying community
banking organization that elects to use the
community bank leverage ratio framework will
calculate its leverage ratio taking into account the
modifications made in relation to the capital
simplifications rule and current expected credit
losses methodology (CECL) transitions final rule.
See 84 FR 35234 (July 22, 2019) and 84 FR 4222
(February 14, 2019), respectively
, a qualifying community
banking organization that elects to use the
community bank leverage ratio framework will
calculate its leverage ratio taking into account the
modifications made in relation to the capital
simplifications rule and current expected credit
losses methodology (CECL) transitions final rule.
See 84 FR 35234 (July 22, 2019) and 84 FR 4222
(February 14, 2019), respectively. The agencies
anticipate that the tier 1 capital amount used in the
numerator of the calculation will reflect any future
modifications made to the tier 1 capital definition
applicable to non-advanced approaches banking
organizations. See 84 FR 35234 (July 22, 2019).
4 For purposes of the community bank leverage
ratio framework, an electing banking organization is
not required to calculate tier 2 capital and therefore
would not be required to make any deductions that
would be taken from tier 2 capital or potentially tier
1 capital due to insufficient tier 2 capital. As part
of the final rule the agencies are amending 12 CFR
3.22(f) (OCC); 12 CFR 217.22(f) (Board); 12 CFR
324.22(f) (FDIC).
Consumer Protection Act (Act), and
proposed to establish a community bank
leverage ratio for qualifying community
banking organizations as a simple
alternative methodology to measure
capital adequacy. The proposal was
intended to simplify regulatory capital
requirements and provide material
regulatory compliance burden relief to
qualifying community banking
organizations that opt into the
community bank leverage ratio
framework.
Section 201 of the Act directs the
agencies to develop a community bank
leverage ratio for qualifying community
banking organizations of not less than 8
percent and not more than 10 percent
plify regulatory capital
requirements and provide material
regulatory compliance burden relief to
qualifying community banking
organizations that opt into the
community bank leverage ratio
framework.
Section 201 of the Act directs the
agencies to develop a community bank
leverage ratio for qualifying community
banking organizations of not less than 8
percent and not more than 10 percent.
The Act provides that a qualifying
community banking organization is a
depository institution or depository
institution holding company with total
consolidated assets of less than $10
billion that satisfies such other factors,
based on its risk profile, that the
agencies determine are appropriate.
Pursuant to section 201, a qualifying
community banking organization that
exceeds the community bank leverage
ratio level established by the agencies
shall be considered to have met: (i) The
generally applicable risk-based and
leverage capital requirements in the
agencies’ capital rules (generally
applicable rule); (ii) the capital ratio
requirements in order to be considered
well capitalized under the agencies’
prompt corrective action (PCA)
framework (in the case of insured
depository institutions); and (iii) any
other applicable capital or leverage
requirements. In addition, the Act
directs the agencies to establish
procedures for the treatment of
qualifying community banking
organizations that fall below the
community bank leverage ratio level
established by the agencies.2
Section 201 of the Act defines the
community bank leverage ratio as the
ratio of a qualifying community banking
organization’s tangible equity capital to
its average total consolidated assets,
both as reported on the qualifying
community banking organization’s
applicable regulatory filing. In addition,
the Act states that the agencies may
determine that a banking organization is
not a qualifying community banking
organization based on the banking
organization’s risk profile
fying community banking
organization’s tangible equity capital to
its average total consolidated assets,
both as reported on the qualifying
community banking organization’s
applicable regulatory filing. In addition,
the Act states that the agencies may
determine that a banking organization is
not a qualifying community banking
organization based on the banking
organization’s risk profile. This
determination shall be based on
consideration of off-balance sheet
exposures, trading assets and liabilities,
total notional derivatives exposures, and
such other factors as the agencies
determine appropriate. The Act also
specifies that the community bank
leverage ratio framework does not limit
the agencies’ authority in effect as of the
date of enactment of the Act.
The Act directs the agencies to
consult with applicable state bank
supervisors in carrying out section 201
of the Act and to notify the applicable
state bank supervisor of any qualifying
community banking organization that
exceeds, or does not exceed after
previously exceeding, the community
bank leverage ratio. As part of this
consultation process, the agencies had a
series of discussions with state bank
supervisors, before and after publication
of the proposal, that helped shape key
elements of the community bank
leverage ratio framework in the final
rule.
In response to the proposal, the
agencies received approximately 50
public comment letters and
approximately 500 form letters from
depository institutions, depository
institution holding companies, trade
associations, and other interested
parties. Commenters generally
supported the agencies’ efforts to
simplify the regulatory capital
requirements
rage ratio framework in the final
rule.
In response to the proposal, the
agencies received approximately 50
public comment letters and
approximately 500 form letters from
depository institutions, depository
institution holding companies, trade
associations, and other interested
parties. Commenters generally
supported the agencies’ efforts to
simplify the regulatory capital
requirements. However, as discussed in
greater detail below, many commenters
indicated that certain aspects of the
proposal were burdensome or
unnecessarily complex, and some
commenters expressed concern that
banking supervisors would make the
proposed community bank leverage
ratio the de facto minimum capital
requirement for community banking
organizations, irrespective of whether
they have opted into the community
bank leverage ratio framework.
Commenters generally favored greater
simplicity in the community bank
leverage ratio framework, and
recommended the removal of the
proposal’s separate PCA proxy levels.
After reviewing the comments, the
agencies are making several
modifications to address commenters’
concerns and further simplify the
community bank leverage ratio
framework while retaining the quality
and quantity of regulatory capital in the
banking system.
B. Summary of the Final Rule
In response to comments received on
the proposal, the agencies are making a
number of changes in this final rule. In
addition, the final rule clarifies other
important aspects of the community
bank leverage ratio framework
implify the
community bank leverage ratio
framework while retaining the quality
and quantity of regulatory capital in the
banking system.
B. Summary of the Final Rule
In response to comments received on
the proposal, the agencies are making a
number of changes in this final rule. In
addition, the final rule clarifies other
important aspects of the community
bank leverage ratio framework. The key
changes being made to the final rule
include the following:
• Adoption of tier 1 capital, and
therefore the existing leverage ratio, into
the community bank leverage ratio
framework;
• Removal of the qualifying criteria
for mortgage servicing assets and
deferred tax assets arising from
temporary differences;
• Removal of the PCA proxy levels;
and
• Allowing a banking organization
that elects to use the community bank
leverage ratio framework to be
considered well-capitalized during the
two-quarter grace period if its leverage
ratio is 9 percent or less and greater than
8 percent.
Under the final rule, the numerator of
the community bank leverage ratio is
the existing measure of tier 1 capital
used by non-advanced approaches
banking organizations.3 4 Numerous
commenters described complexities that
would be created with the proposed
introduction of a new measure of
capital, tangible equity, in the
community bank leverage ratio
framework and, therefore, the agencies
have adopted the commenters’
recommendation to use tier 1 capital.
The use of tier 1 capital also has the
benefit of including the existing
threshold deduction approaches for
mortgage servicing assets (MSAs) and
deferred tax assets arising from
temporary differences (temporary
difference DTAs) which enabled the
agencies to remove the qualifying
criteria related to these exposures from
the community bank leverage ratio
framework
n to use tier 1 capital.
The use of tier 1 capital also has the
benefit of including the existing
threshold deduction approaches for
mortgage servicing assets (MSAs) and
deferred tax assets arising from
temporary differences (temporary
difference DTAs) which enabled the
agencies to remove the qualifying
criteria related to these exposures from
the community bank leverage ratio
framework. Due to the adoption of tier
1 capital, the community bank leverage
ratio is generally calculated in the same
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5 An advanced approaches banking organization
is generally defined as a firm with at least $250
billion in total consolidated assets or at least $10
billion in total on-balance sheet foreign exposure,
and depository institution subsidiaries of those
firms. Proposed rulemakings to tailor capital and
liquidity requirements applicable to large banking
organizations may result in changing the definition
of advanced approaches banking organization. See
83 FR 66024 (December 21, 2018) and 84 FR 24296
(May 24, 2019).
6 As a result of adopting the grace period
construct, the final rule does not include the
agencies’ proposed PCA proxy levels, which would
have allowed certain banking organizations that fell
to a leverage ratio of 9 percent or lower to remain
in the community bank leverage ratio framework
indefinitely.
7 12 CFR 3.10(a)–(b) (OCC); 12 CFR 217.10(a)–(b)
(Board); 12 CFR 324.10(a)–(b) (FDIC).
manner as the generally applicable
rule’s leverage ratio: Tier 1 capital
divided by average total consolidated
assets minus amounts deducted from
tier 1 capital. As a result, the final rule
incorporates and refers to the generally
applicable rule’s leverage ratio
leverage ratio framework
indefinitely.
7 12 CFR 3.10(a)–(b) (OCC); 12 CFR 217.10(a)–(b)
(Board); 12 CFR 324.10(a)–(b) (FDIC).
manner as the generally applicable
rule’s leverage ratio: Tier 1 capital
divided by average total consolidated
assets minus amounts deducted from
tier 1 capital. As a result, the final rule
incorporates and refers to the generally
applicable rule’s leverage ratio.
Commenters also raised concerns that
the PCA proxy levels included in the
proposal caused unnecessary
complexity in the community bank
leverage ratio framework and requested
that the framework include a grace
period to transition back to the generally
applicable rule if a banking
organization’s community bank leverage
ratio was less than the well-capitalized
threshold. The agencies are
incorporating this feedback into the
final rule by modifying the definition of
a ‘‘qualifying community banking
organization’’ to include the level of the
leverage ratio as a qualifying criterion.
The final rule provides that to be a
‘‘qualifying community banking
organization,’’ a banking organization
must not be an advanced approaches
banking organization 5 and must meet
the following qualifying criteria: (i) A
leverage ratio of greater than 9 percent;
(ii) total consolidated assets of less than
$10 billion; (iii) total off-balance sheet
exposures (excluding derivatives other
than sold credit derivatives and
unconditionally cancelable
commitments) of 25 percent or less of
total consolidated assets; and (iv) the
sum of total trading assets and trading
liabilities of 5 percent or less of total
consolidated assets. Consistent with
section 201, the final rule provides that
qualifying community banking
organizations that opt into the
community bank leverage ratio
framework (electing banking
organization) will be deemed to have
met the ‘‘well capitalized’’ ratio
requirements and be in compliance with
the generally applicable rule
trading
liabilities of 5 percent or less of total
consolidated assets. Consistent with
section 201, the final rule provides that
qualifying community banking
organizations that opt into the
community bank leverage ratio
framework (electing banking
organization) will be deemed to have
met the ‘‘well capitalized’’ ratio
requirements and be in compliance with
the generally applicable rule. Such
banking organizations will not be
required to calculate and report risk-
based capital ratios.
Notably, the agencies have retained
the proposal’s 9 percent calibration for
the leverage ratio in the community
bank leverage ratio framework. The
agencies believe that a 9 percent
calibration, in conjunction with the
final rule’s qualifying criteria, will not
result in a reduction in the aggregate
level of regulatory capital currently held
by electing banking organizations.
Further, incorporating into the
community bank leverage ratio
framework the existing leverage ratio
and the two-quarter grace period will
facilitate the transition to and from the
generally applicable rule. Banking
organizations opt into and out of the
framework through their Consolidated
Reports of Condition and Income (Call
Report) or Form FR–Y9C.
If a qualifying community banking
organization that has opted into the
community bank leverage ratio
framework subsequently fails to satisfy
one or more of the qualifying criteria but
continues to report a leverage ratio of
greater than 8 percent, the banking
organization could continue to use the
community bank leverage ratio
framework and be deemed to meet the
‘‘well capitalized’’ capital ratio
requirements for a grace period of up to
two quarters.6 As long as the banking
organization is able to return to
compliance with all the qualifying
criteria within two quarters, it will
continue to be deemed to meet the ‘‘well
capitalized’’ ratio requirements and be
in compliance with the generally
applicable rule
io
framework and be deemed to meet the
‘‘well capitalized’’ capital ratio
requirements for a grace period of up to
two quarters.6 As long as the banking
organization is able to return to
compliance with all the qualifying
criteria within two quarters, it will
continue to be deemed to meet the ‘‘well
capitalized’’ ratio requirements and be
in compliance with the generally
applicable rule. A banking organization
will be required to comply with the
generally applicable rule and file the
relevant regulatory reports if the
banking organization (i) is unable to
restore compliance with all qualifying
criteria during the two-quarter grace
period (including coming into
compliance with the greater than 9
percent leverage ratio requirement), (ii)
reports a leverage ratio of 8 percent or
less, or (iii) ceases to satisfy the
qualifying criteria due to consummation
of a merger transaction.
The agencies believe that the final
rule provides a simple framework that
simultaneously meets safety and
soundness goals and responds to the
concerns conveyed through comments
received on the proposal. Additionally,
the final rule meets the policy objectives
described in the proposal. First, the
community bank leverage ratio
framework is available to a meaningful
number of well-capitalized banking
organizations with less than $10 billion
in total consolidated assets. Second, the
community bank leverage ratio
requirement is calibrated to maintain
the overall amount of capital currently
held by qualifying community banking
organizations. Third, banking
organizations with higher risk profiles
remain subject to the generally
applicable rule to ensure that such
banking organizations hold capital
commensurate with the risk of their
exposures and activities.7 Fourth, the
agencies maintain the authority to take
supervisory action under the PCA
framework and other statutes and
regulations based on a banking
organization’s capital ratios and risk
profile
s with higher risk profiles
remain subject to the generally
applicable rule to ensure that such
banking organizations hold capital
commensurate with the risk of their
exposures and activities.7 Fourth, the
agencies maintain the authority to take
supervisory action under the PCA
framework and other statutes and
regulations based on a banking
organization’s capital ratios and risk
profile. The final rule also provides
regulatory compliance burden relief as
the community bank leverage ratio is
simple to apply and allows a qualifying
community banking organization to
avoid the burden of calculating and
reporting risk-based capital ratios under
the generally applicable rule.
II. Proposed Rule
A. Proposed Community Bank Leverage
Ratio Framework
The agencies proposed the
community bank leverage ratio
framework as a simple alternative
methodology to measure capital
adequacy for qualifying community
banking organizations, based on the
requirements of section 201 of the Act.
Under the proposal, a qualifying
community banking organization would
have been defined as a depository
institution or depository institution
holding company that was not an
advanced approaches banking
organization and that met the following
criteria (qualifying criteria), each as
described further below:
• Total consolidated assets of less
than $10 billion;
• Total off-balance sheet exposures
(excluding derivatives other than sold
credit derivatives and unconditionally
cancelable commitments) of 25 percent
or less of total consolidated assets;
• Total trading assets plus trading
liabilities of 5 percent or less of total
consolidated assets;
• MSAs of 25 percent or less of
tangible equity (as defined in the
proposal); and
• Temporary difference DTAs of 25
percent or less of tangible equity.
Under the proposal, the community
bank leverage ratio would have been
calculated as the ratio of tangible equity
to average total consolidated assets
ding assets plus trading
liabilities of 5 percent or less of total
consolidated assets;
• MSAs of 25 percent or less of
tangible equity (as defined in the
proposal); and
• Temporary difference DTAs of 25
percent or less of tangible equity.
Under the proposal, the community
bank leverage ratio would have been
calculated as the ratio of tangible equity
to average total consolidated assets.
Tangible equity would have been
defined as total bank equity capital or
total holding company equity capital, as
applicable, prior to including minority
interests, and excluding accumulated
other comprehensive income (AOCI),
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8 See 84 FR 35243 (July 22, 2019). The agencies
also are adopting a final rule that permits banking
organizations not subject to the advanced
approaches capital rule to implement the
simplifications rule in the quarter beginning
January 1, 2020, or wait until the quarter beginning
April 1, 2020.
9 Consistent with the proposal, the agencies have
reserved the authority to disallow the use of the
community bank leverage ratio framework by a
depository institution or depository institution
holding company, based on the risk profile of the
banking organization. This authority is reserved
under the general reservation of authority included
in the capital rule, in which the community bank
leverage ratio framework would be codified. See 12
CFR 3.1(d) (OCC); 12 CFR 217.1(d) (Board); 12 CFR
Continued
deferred tax assets arising from net
operating loss and tax credit carry
forwards, goodwill, and other intangible
assets (other than MSAs), each as of the
most recent calendar quarter and
calculated in accordance with a
qualifying community banking
organization’s regulatory reports
erage ratio framework would be codified. See 12
CFR 3.1(d) (OCC); 12 CFR 217.1(d) (Board); 12 CFR
Continued
deferred tax assets arising from net
operating loss and tax credit carry
forwards, goodwill, and other intangible
assets (other than MSAs), each as of the
most recent calendar quarter and
calculated in accordance with a
qualifying community banking
organization’s regulatory reports.
Average total consolidated assets would
have been calculated in a manner
similar to the generally applicable rule’s
leverage ratio denominator in that
amounts deducted from the numerator
would also have been excluded from the
denominator. Under the proposal, a
qualifying community banking
organization could have elected to use
the community bank leverage ratio
framework if its community bank
leverage ratio was greater than 9
percent.
The proposal would have permitted
an electing banking organization to
remain in the community bank leverage
ratio framework even in cases where
such an institution’s community bank
leverage ratio subsequently fell to 9
percent or less. In this situation, the
proposal would have continued to
provide for the agencies’ supervisory
actions under PCA and other applicable
statutes and regulations. Specifically,
for insured depository institutions, the
proposal would have incorporated
community bank leverage ratio levels as
proxies for the following PCA
categories: Adequately capitalized,
undercapitalized and significantly
undercapitalized. If an electing banking
organization had met certain
community bank leverage ratio levels, it
would have been considered to have
met the capital ratio requirements
within the applicable corresponding
PCA category and been subject to the
same restrictions that currently apply to
any other insured depository institution
in the same PCA category
apitalized and significantly
undercapitalized. If an electing banking
organization had met certain
community bank leverage ratio levels, it
would have been considered to have
met the capital ratio requirements
within the applicable corresponding
PCA category and been subject to the
same restrictions that currently apply to
any other insured depository institution
in the same PCA category.
After issuing the proposal, the
agencies proposed a regulatory capital
schedule that would have been simpler
than Schedules RC–R of the Call Report
and HC–R of Form FR Y–9C for use by
electing banking organizations. On this
proposed reporting schedule, the
community bank leverage ratio
calculation would have required a
banking organization to report
significantly less information than
under the generally applicable rule.
B. Summary of Comments
Collectively, the agencies received
approximately 50 public comment
letters and approximately 500 form
letters on the proposal from depository
institutions, depository institution
holding companies, trade associations,
and other interested parties. As further
detailed in the more comprehensive
discussion of the final rule, commenters
generally supported the agencies’ efforts
to propose a simpler regulatory capital
framework but expressed concerns with
some aspects of the proposal.
Several commenters expressed
concern that calibrating the community
bank leverage ratio at 9 percent is
unnecessarily punitive and would
disqualify too many banking
organizations from being able to use the
community bank leverage ratio
framework. These commenters favored
calibrating the community bank
leverage ratio at 8 percent. One
commenter suggested calibrating the
community bank leverage ratio at 10
percent, the highest permitted by
statute, because higher leverage ratios
may lower the adverse effects of crises
on U.S. GDP, which exceeds the costs
that may arise from lower capital
formation and lower GDP
ge ratio
framework. These commenters favored
calibrating the community bank
leverage ratio at 8 percent. One
commenter suggested calibrating the
community bank leverage ratio at 10
percent, the highest permitted by
statute, because higher leverage ratios
may lower the adverse effects of crises
on U.S. GDP, which exceeds the costs
that may arise from lower capital
formation and lower GDP.
Many commenters also expressed
concern that the proposed PCA proxy
levels would have added unnecessary
complexity to the community bank
leverage ratio framework, and therefore
recommended their elimination in the
final rule. Some commenters expressed
concern that the agencies would not
permit an insured depository institution
with a community bank leverage ratio at
or below 9 percent to demonstrate that
it is well capitalized under the generally
applicable rule before assigning it a PCA
category other than well capitalized.
Other commenters indicated that some
of the qualifying criteria were
unnecessary (such as that for MSAs),
overly complex to calculate (such as the
off-balance sheet exposures criterion), or
did not appropriately reflect the risks of
underlying assets.
Multiple commenters suggested that
the proposed numerator of the
community bank leverage ratio should
be based on tier 1 capital, as defined
under the generally applicable rule,
rather than on a new ‘‘tangible equity’’
measure. Commenters expressed
concern that examiners may penalize
banking organizations for opting into or
out of the framework, and that the
community bank leverage ratio could
become the de facto minimum capital
requirement for all community banking
organizations.
III. Final Rule
A. Qualifying Criteria for the
Community Bank Leverage Ratio
Framework
The agencies received comments
requesting that they eliminate or modify
certain of the qualifying criteria in the
proposal, particularly the MSA and the
temporary difference DTA criteria
bank leverage ratio could
become the de facto minimum capital
requirement for all community banking
organizations.
III. Final Rule
A. Qualifying Criteria for the
Community Bank Leverage Ratio
Framework
The agencies received comments
requesting that they eliminate or modify
certain of the qualifying criteria in the
proposal, particularly the MSA and the
temporary difference DTA criteria.
Many of these commenters also
suggested using tier 1 capital, as
recently modified by the agencies in a
final rule (simplifications rule),8 as the
numerator of the leverage ratio. Several
commenters noted that some of the
qualifying criteria, such as the proposed
limit for MSAs, could prevent many
otherwise qualifying community
banking organizations from opting into
the community bank leverage ratio
framework. Finally, some commenters
suggested that the off-balance sheet
criterion, as proposed, would be overly
burdensome for community banking
organizations to calculate and that
certain elements included in this
criterion should be eliminated as they
do not represent material risk to banking
organizations.
After considering the comments, the
agencies have decided to modify the
definition of ‘‘qualifying community
banking organization’’ by removing the
MSA criterion and the temporary
difference DTA criterion. Exposures to
MSAs and temporary difference DTAs
will be addressed through the use of tier
1 capital as the numerator, which
requires deduction of such assets to the
extent they exceed certain regulatory
thresholds, rather than the proposed use
of ‘‘tangible equity.’’ The use of tier 1
capital as the numerator is discussed in
more detail below in this
SUPPLEMENTARY INFORMATION
criterion. Exposures to
MSAs and temporary difference DTAs
will be addressed through the use of tier
1 capital as the numerator, which
requires deduction of such assets to the
extent they exceed certain regulatory
thresholds, rather than the proposed use
of ‘‘tangible equity.’’ The use of tier 1
capital as the numerator is discussed in
more detail below in this
SUPPLEMENTARY INFORMATION. Under the
final rule, a qualifying banking
organization must not be an advanced
approaches banking organization and
must have:
• A leverage ratio of greater than 9
percent;
• Total consolidated assets of less
than $10 billion;
• Total off-balance sheet exposures
(excluding derivatives other than sold
credit derivatives and unconditionally
cancelable commitments) of 25 percent
or less of total consolidated assets, and
• Total trading assets plus trading
liabilities of 5 percent or less of total
consolidated assets.9
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324.1(d) (FDIC). In addition, for purposes of the
capital rule and section 201 of the Act, the agencies
have reserved the authority to take action under
other provisions of law, including action to address
unsafe or unsound practices or conditions, deficient
capital levels, or violations of law or regulation. See
12 CFR 3.1(b) (OCC); 12 CFR 217.1(b) (Board); 12
CFR 324.1(b) (FDIC).
10 See 84 FR 35243 (July 22, 2019).
11 See 83 FR 66024 (December 21, 2018) and 84
FR 24296 (May 24, 2019).
12 See 12 CFR 324.33 (FDIC); 12 CFR 217.33
(Federal Reserve); 12 CFR 3.33 (OCC).
1. Leverage Ratio of Greater Than 9
Percent
Under the proposal, a banking
organization would have been required
to have a community bank leverage ratio
of greater than 9 percent in order to be
eligible to opt into the community bank
leverage ratio framework
December 21, 2018) and 84
FR 24296 (May 24, 2019).
12 See 12 CFR 324.33 (FDIC); 12 CFR 217.33
(Federal Reserve); 12 CFR 3.33 (OCC).
1. Leverage Ratio of Greater Than 9
Percent
Under the proposal, a banking
organization would have been required
to have a community bank leverage ratio
of greater than 9 percent in order to be
eligible to opt into the community bank
leverage ratio framework. The final rule
adopts the 9 percent calibration of the
community bank leverage ratio as
proposed. The proposal also would have
allowed an electing banking
organization to remain in the
community bank leverage ratio
framework despite having a community
bank leverage ratio which subsequently
fell to 9 percent or less. As discussed
above, the final rule eliminates the PCA
proxy levels and, therefore, an electing
banking organization will generally be
required to maintain a leverage ratio of
greater than 9 percent in order to be
eligible to use the community bank
leverage ratio framework. A two-quarter
grace period, as discussed in further
detail below, is available for a banking
organization that ceases to meet any of
the qualifying criteria, including a
banking organization whose leverage
ratio falls to 9 percent or less, but is
greater than 8 percent. During the grace
period, a banking organization may
continue to be treated as a qualifying
community banking organization and is
presumed to satisfy the ‘‘well
capitalized’’ ratio requirements and be
in compliance with the generally
applicable rule without having to
calculate and report risk-based capital
ratios.
2. Total Consolidated Assets
Under the proposal, a qualifying
community banking organization would
be required to have less than $10 billion
in total consolidated assets as of the end
of the most recent calendar quarter, in
accordance with the Act. Total
consolidated assets would be calculated
in accordance with the reporting
instructions to Schedule RC of the Call
Report or Schedule HC of Form FR Y–
9C, as applicable
der the proposal, a qualifying
community banking organization would
be required to have less than $10 billion
in total consolidated assets as of the end
of the most recent calendar quarter, in
accordance with the Act. Total
consolidated assets would be calculated
in accordance with the reporting
instructions to Schedule RC of the Call
Report or Schedule HC of Form FR Y–
9C, as applicable.
A commenter indicated that the Act
places no limit on the ability of the
agencies to apply the community bank
leverage ratio framework to institutions
with $10 billion or more in total assets
and suggested that the agencies should
apply the community bank leverage
ratio framework based on suitability for
relief rather than on size thresholds. The
same commenter urged the agencies to
take into account acquisitions and to
index applicability to incorporate
inflation or other relevant market
measures.
The agencies have considered the
concerns raised with regard to the asset
size threshold. The agencies continue to
believe that the community bank
leverage ratio framework is appropriate
for most banking organizations with
total consolidated assets of less than $10
billion that meet the other qualifying
criteria. The agencies believe that the
generally applicable rule is appropriate
for larger banking organizations and
banking organizations with
concentrations in off-balance sheet
exposures and trading assets and
liabilities because such banking
organizations may present risks that are
not appropriately captured by the
community bank leverage ratio
framework
t meet the other qualifying
criteria. The agencies believe that the
generally applicable rule is appropriate
for larger banking organizations and
banking organizations with
concentrations in off-balance sheet
exposures and trading assets and
liabilities because such banking
organizations may present risks that are
not appropriately captured by the
community bank leverage ratio
framework. The agencies recently
finalized a rule to simplify the generally
applicable rule, and have proposed to
modify and tailor several of the
prudential requirements applicable to
banking organizations with $100 billion
or more in total consolidated assets.10 11
The agencies believe these revisions
reflect an appropriate tailoring of
regulations based on asset size and other
risk characteristics to ensure that the
requirements remain appropriate for the
risk profiles of different banking
organizations while also maintaining
the safety and soundness of the banking
industry. As such, the agencies are
finalizing without modification the $10
billion in total assets size threshold.
3. Total Off-Balance Sheet Exposures
Under the proposal, a qualifying
community banking organization would
have been required to have total off-
balance sheet exposures of 25 percent or
less of its total consolidated assets, as of
the end of the most recent calendar
quarter. The agencies included this
qualifying criterion in the community
bank leverage ratio framework because
the proposed community bank leverage
ratio included only on-balance sheet
assets in its denominator and thus
would not have required a qualifying
community banking organization to
hold capital against its off-balance sheet
exposures. This qualifying criterion was
intended to reduce the likelihood that a
qualifying community banking
organization with significant off-balance
sheet exposures would hold less capital
under the community bank leverage
ratio framework than under the
generally applicable rule
ot have required a qualifying
community banking organization to
hold capital against its off-balance sheet
exposures. This qualifying criterion was
intended to reduce the likelihood that a
qualifying community banking
organization with significant off-balance
sheet exposures would hold less capital
under the community bank leverage
ratio framework than under the
generally applicable rule.
Under the proposal, total off-balance
sheet exposures would have been
calculated as the sum of the notional
amounts of certain off-balance sheet
items against which banking
organizations would hold capital under
the generally applicable rule 12 as of the
end of the most recent calendar quarter.
Total off-balance sheet exposures would
have included:
a. The unused portions of
commitments (except for
unconditionally cancellable
commitments);
b. Self-liquidating, trade-related
contingent items that arise from the
movement of goods;
c. Transaction-related contingent
items (i.e., performance bonds, bid
bonds and warranties);
d. Sold credit protection in the form
of guarantees and credit derivatives;
e. Credit-enhancing representations
and warranties;
f. Off-balance sheet securitization
exposures;
g. Letters of credit;
h. Forward agreements that are not
derivative contracts; and
i. Securities lending and borrowing
transactions.
Total off-balance sheet exposures
would have excluded the notional
amount for all derivative contracts
except credit derivatives for sold credit
protection. As stated in the proposal,
the agencies believe that the notional
amount for derivatives (other than credit
derivatives for sold credit protection) is
not an appropriate indicator of credit
risk and could inadvertently disqualify
a banking organization from using the
community bank leverage ratio
framework if the banking organization is
otherwise appropriately using
derivatives to hedge its risks
in the proposal,
the agencies believe that the notional
amount for derivatives (other than credit
derivatives for sold credit protection) is
not an appropriate indicator of credit
risk and could inadvertently disqualify
a banking organization from using the
community bank leverage ratio
framework if the banking organization is
otherwise appropriately using
derivatives to hedge its risks. The
proposed components of total off-
balance sheet exposures would have
been generally consistent with off-
balance sheet items that are included in
risk-weighted assets in the generally
applicable rule, except for securities
lending and borrowing transactions.
Securities lending and borrowing
transactions would have been assigned
amounts in accordance with the
reporting instructions for these items in
Schedules RC–L of the Call Report or
HC–L of Form FR Y–9C, as applicable.
The proposed calculation of total off-
balance sheet exposures would have
been simpler than under the generally
applicable rule, which requires that off-
balance sheet exposures be converted to
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on-balance sheet equivalents for
purposes of determining capital
requirements.
The agencies received several
comments and requests for clarification
on the proposed limit for off-balance
sheet exposures. One commenter
expressed concern that the process for
categorizing off-balance sheet
exposures, such as off-balance sheet
securitizations, was overly complex,
and the commenter would prefer that
the off-balance sheet filter instead
identify specific transactions and
products routinely used by community
banks that meet the off-balance sheet
exposure definition
off-balance
sheet exposures. One commenter
expressed concern that the process for
categorizing off-balance sheet
exposures, such as off-balance sheet
securitizations, was overly complex,
and the commenter would prefer that
the off-balance sheet filter instead
identify specific transactions and
products routinely used by community
banks that meet the off-balance sheet
exposure definition. Another
commenter found the wording in the
proposed rule unclear and noted that it
would be beneficial for the agencies to
reference the specific Schedule RC–L
line items that would be included in the
25 percent limitation for off-balance
sheet line items.
Several commenters expressed
concern about the inclusion of
residential mortgage-related off-balance
sheet items. One commenter wrote that
the agencies should not exclude banking
organizations from using the community
bank leverage ratio framework due to
any mortgage origination-related
hedging activity. The commenter
expressed concern that as proposed the
criterion may capture certain exposures
related to routine functioning of the
mortgage market. Another commenter
noted that mortgage sales to certain
Federal Home Loan Banks (FHLBs)
through the Mortgage Partnership
Finance Program could be captured by
the off-balance sheet qualifying criteria.
A commenter suggested that FHLB
advances should be eliminated from the
calculation because such advances are
typically secured at a significant
discount relative to underlying loan
collateral. The commenter was
concerned that a banking organization
may be disqualified from the
community bank leverage ratio
framework due to its level of unfunded
commitments and FHLB lines of credit.
Finally, one commenter requested
clarification on whether sales of when-
issued mortgage-backed security
contracts are included in the 25 percent
limitation, stating that these items
should be excluded because, in the
commenter’s view, they are of lower
risk
e disqualified from the
community bank leverage ratio
framework due to its level of unfunded
commitments and FHLB lines of credit.
Finally, one commenter requested
clarification on whether sales of when-
issued mortgage-backed security
contracts are included in the 25 percent
limitation, stating that these items
should be excluded because, in the
commenter’s view, they are of lower
risk.
The agencies considered the
commenters’ concerns and have decided
to finalize the off-balance sheet
qualifying criterion as proposed with
several clarifications. The agencies are
clarifying that the off-balance sheet
qualifying criterion incorporates off-
balance sheet exposures currently
required to be captured and reported by
banking organizations in Schedules RC–
L and RC–R of the Call Report or HC–
L and HC–R of Form FR Y–9C which
thereby permits these firms to leverage
their existing identification,
measurement and reporting
infrastructure for these exposures. The
agencies also are clarifying that banking
organizations are only required to
identify off-balance sheet securitizations
to the extent that they are not already
captured as part of another off-balance
sheet exposure category. For example, if
a banking organization issues a credit
enhancing representation and warranty
that also meets the definition of a
traditional securitization, the final rule
does not require that such an exposure
be separately identified as an off-
balance sheet securitization exposure
because the exposure would already be
captured through the requirement to
include credit enhancing
representations and warranties in the
off-balance sheet qualifying criterion.
The agencies also are clarifying that
hedging techniques related to mortgage
banking activities are generally only
captured in the off-balance sheet
qualifying criterion to the extent such
exposures are treated as off-balance
sheet exposures and subject to credit
conversion factors under the generally
applicable rule
entations and warranties in the
off-balance sheet qualifying criterion.
The agencies also are clarifying that
hedging techniques related to mortgage
banking activities are generally only
captured in the off-balance sheet
qualifying criterion to the extent such
exposures are treated as off-balance
sheet exposures and subject to credit
conversion factors under the generally
applicable rule. For this reason, typical
mortgage banking activities such as
forward loan delivery commitments
between banking organizations and
investors, which typically are derivative
contracts, were excluded from the off-
balance sheet exposure criterion in the
proposal and are excluded under the
final rule. Put and call options on
mortgage-backed securities are also
typically derivatives and excluded from
this criterion under the final rule. A
contractual obligation for the future
purchase of a ‘‘to be announced’’ (i.e.,
when-issued) mortgage securities
contract, that does not meet the
definition of a derivative contract under
the generally applicable rule, would be
captured in the off-balance sheet
qualifying criterion as it would be
considered a forward agreement under
the generally applicable rule. In
contrast, a contractual obligation for the
future sale (rather than purchase) of a
‘‘to be announced’’ mortgage securities
contract, that does not meet the
definition of a derivative contract under
the generally applicable rule, would not
be captured in the off-balance sheet
qualifying criterion as it would not be
considered a forward agreement under
the generally applicable rule.
Banking organizations that sell
mortgages to certain FHLBs through the
Mortgage Partnership Finance Program
may provide a credit enhancement to
the FHLB
meet the
definition of a derivative contract under
the generally applicable rule, would not
be captured in the off-balance sheet
qualifying criterion as it would not be
considered a forward agreement under
the generally applicable rule.
Banking organizations that sell
mortgages to certain FHLBs through the
Mortgage Partnership Finance Program
may provide a credit enhancement to
the FHLB. If these credit enhancements
meet the definition of a credit-
enhancing representation and warranty
or would otherwise be considered an
off-balance sheet securitization under
the generally applicable rule, then the
exposure amount would be included in
the off-balance sheet qualifying
criterion. Because these are credit risk
exposures that would be assigned risk-
based capital under the generally
applicable rule, inclusion in the off-
balance sheet qualifying criterion is
appropriate.
The agencies analyzed average off-
balance sheet exposures for banking
organizations with less than $10 billion
in total consolidated assets and
observed that the vast majority of such
banking organizations report off-balance
sheet exposures totaling less than 25
percent of total consolidated assets, as
of March 31, 2019. Accordingly, the
agencies have determined that both the
definition and calibration of the total
off-balance sheet exposures qualifying
criterion should allow a meaningful
number of banking organizations to use
the community bank leverage ratio
framework without unduly restricting
lending practices. The criterion should
help to prevent banking organizations
from engaging in substantial off-balance
sheet activity without a commensurate
capital requirement.
4. Total Trading Assets and Trading
Liabilities
Under the proposal, a qualifying
community banking organization would
have been required to have total trading
assets and trading liabilities of 5 percent
or less of its total consolidated assets,
each measured as of the end of the most
recent calendar quarter
bstantial off-balance
sheet activity without a commensurate
capital requirement.
4. Total Trading Assets and Trading
Liabilities
Under the proposal, a qualifying
community banking organization would
have been required to have total trading
assets and trading liabilities of 5 percent
or less of its total consolidated assets,
each measured as of the end of the most
recent calendar quarter. Total trading
assets and trading liabilities would have
been calculated as the sum of those
exposures, in accordance with the
reporting instructions for these items on
Schedules RC of the Call Report or HC
of Form FR–Y–9C, as applicable. A
banking organization would divide the
sum of its total trading assets and
trading liabilities by its total
consolidated assets to determine its
percentage of total trading assets and
trading liabilities.
The agencies recognize the potential
elevated levels of risk and complexity
that can be associated with certain
trading activities. For this reason,
banking organizations with significant
trading assets and trading liabilities are
subject to a market risk capital
requirement under the generally
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13 12 CFR part 3, subpart F (OCC); 12 CFR part
217, subpart F (Board); 12 CFR part 324, subpart F
(FDIC).
applicable rule.13 In contrast, electing
banking organizations would not be
required to calculate additional market
risk capital requirements and, as a
result, the community bank leverage
ratio framework may not appropriately
capitalize for material amounts of
trading assets and trading liabilities. In
addition, elevated levels of trading
activity can produce a heightened level
of earnings volatility, which has
implications for capital adequacy
ions would not be
required to calculate additional market
risk capital requirements and, as a
result, the community bank leverage
ratio framework may not appropriately
capitalize for material amounts of
trading assets and trading liabilities. In
addition, elevated levels of trading
activity can produce a heightened level
of earnings volatility, which has
implications for capital adequacy.
Therefore, the agencies do not believe it
is appropriate to make the community
bank leverage ratio framework available
to banking organizations with material
market risk exposure. However, the
agencies do not believe that low levels
of trading activity should preclude a
banking organization from using the
community bank leverage ratio
framework.
Based on the agencies’ analysis, the
vast majority of banking organizations
with less than $10 billion in total
consolidated assets have total trading
assets and trading liabilities well below
5 percent of their total consolidated
assets, as of March 31, 2019. The
agencies believe that the proposed 5
percent threshold will help ensure that
banking organizations that engage in
significant trading activity are not
subject to the community bank leverage
ratio framework. Further, this criterion
is generally consistent with section 203
of the Act, which excludes a community
banking organization from proprietary
trading restrictions if its total trading
assets and trading liabilities are 5
percent or less of its total consolidated
assets. The agencies did not receive any
comment with regard to the proposed
qualifying criterion for total trading
assets and trading liabilities and are
finalizing this requirement as proposed.
5. Advanced Approaches Banking
Organizations
Under the proposal, advanced
approaches banking organizations
would not have been eligible to use the
community bank leverage ratio
framework
dated
assets. The agencies did not receive any
comment with regard to the proposed
qualifying criterion for total trading
assets and trading liabilities and are
finalizing this requirement as proposed.
5. Advanced Approaches Banking
Organizations
Under the proposal, advanced
approaches banking organizations
would not have been eligible to use the
community bank leverage ratio
framework. The agencies received no
comment on this requirement and
believe that, in general, section 201 of
the Act is designed to provide
regulatory burden relief for banking
organizations with less than $10 billion
in total consolidated assets and that
have a limited risk profile.
A banking organization with less than
$10 billion in total consolidated assets
may be subject to the advanced
approaches rules if it is a subsidiary of
a much larger banking organization.
While these types of advanced
approaches banking organizations may
be relatively small banking
organizations, the agencies do not
believe they share the same type of risk
characteristics as non-complex
community banking organization for
which the community bank leverage
ratio framework is appropriate.
Consequently, under the final rule, an
advanced approaches banking
organization will not be eligible to use
the community bank leverage ratio
framework, regardless of its size.
B. Definitions of the Leverage Ratio’s
Numerator and Denominator
1. Numerator
Under the proposal, the numerator of
the community bank leverage ratio
would have been tangible equity,
calculated as a banking organization’s
total bank equity capital or total holding
company equity capital, as applicable,
determined in accordance with the
reporting instructions to Schedule RC of
the Call Report or Schedule HC of Form
FR Y–9C, prior to including minority
interests, less: (i) Accumulated other
comprehensive income (AOCI), (ii) all
intangible assets (other than MSAs), and
calculated as a banking organization’s
total bank equity capital or total holding
company equity capital, as applicable,
determined in accordance with the
reporting instructions to Schedule RC of
the Call Report or Schedule HC of Form
FR Y–9C, prior to including minority
interests, less: (i) Accumulated other
comprehensive income (AOCI), (ii) all
intangible assets (other than MSAs), and
(iii) DTAs, net of any related valuation
allowances, that arise from net operating
loss and tax credit carryforwards, each
as of the end of the most recent calendar
quarter. Tangible equity would not have
included minority interests (equity of a
consolidated subsidiary that is not
owned by the qualifying community
banking organization) because minority
interests do not have the same loss
absorption capacity as other
components of tangible equity at the
consolidated banking organization level.
The agencies received numerous
comments in response to the proposed
use of tangible equity as the numerator
of the community bank leverage ratio.
Many commenters noted that banking
organizations are already familiar with
the current tier 1 capital calculation,
and that tier 1 capital, therefore, should
be used to calculate the community
bank leverage ratio instead of tangible
equity. A commenter also argued that
the burden associated with
implementing the community bank
leverage ratio framework would exceed
the reporting relief provided by reduced
complexity. Several commenters
expressed concerns that it would be too
complex for a banking organization to
switch between the calculation of
tangible equity and tier 1 capital as it
either opts into or out of the community
bank leverage ratio framework or no
longer meets the definition of a
qualifying community banking
organization
would exceed
the reporting relief provided by reduced
complexity. Several commenters
expressed concerns that it would be too
complex for a banking organization to
switch between the calculation of
tangible equity and tier 1 capital as it
either opts into or out of the community
bank leverage ratio framework or no
longer meets the definition of a
qualifying community banking
organization. Several commenters
recommended the agencies instead use
tier 1 capital for the numerator,
suggesting that this would not only
simplify the calculation when switching
between frameworks but would also
increase comparability across all
banking organizations. Commenters also
preferred to use tier 1 capital for the
numerator in order to ensure that
certain instruments, such as trust
preferred securities (TruPS) and
common stock issued by bank
subsidiaries, would count as regulatory
capital under the community bank
leverage ratio framework, up to their
current limits. Finally, several
commenters noted that use of tier 1
capital as the numerator would avoid
the need for revisions to state banking
laws that reference tier 1 capital,
including but not limited to state law
lending limits.
Multiple commenters, although not
explicitly expressing a preference for
using tier 1 capital as the numerator, did
request that certain adjustments be
made to the proposed definition of
tangible equity. A commenter
recommended that cumulative preferred
stock with a stated final maturity date
be included as an eligible component of
tangible equity. Several commenters
requested that the agencies allow TruPS
to count as tangible equity. A
commenter recommended that the
agencies include common stock
minority interest of up to 10 percent of
the numerator of the community bank
leverage ratio where the subsidiary
holds risk-weighted assets of at least the
amount of common stock minority
interest being included. Finally, some
commenters expressed concern that the
CECL methodology under U.S
TruPS
to count as tangible equity. A
commenter recommended that the
agencies include common stock
minority interest of up to 10 percent of
the numerator of the community bank
leverage ratio where the subsidiary
holds risk-weighted assets of at least the
amount of common stock minority
interest being included. Finally, some
commenters expressed concern that the
CECL methodology under U.S. generally
accepted accounting principles could
impact eligibility for the community
bank leverage ratio framework and
recommended that the agencies provide
for an ongoing adjustment to the
community bank leverage ratio
numerator that approximates the
incremental regulatory capital impact of
CECL credit loss allowance levels over
levels currently recorded under U.S.
generally accepted accounting
principles.
Taking into account the concerns of
commenters and seeking to balance
burden reduction with safety and
soundness, the agencies have decided to
replace the proposed tangible equity
measure with the current calculation of
tier 1 capital as the numerator of the
community bank leverage ratio. This
change would align the final rule’s
calculation of the leverage ratio with the
generally applicable rule’s leverage
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Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations
14 See 84 FR 35234 (July 22, 2019).
15 See 12 CFR 3.22(c)(2) (OCC); 12 CFR
217.22(c)(2) (Board); 12 CFR 324.22(c)(2) (FDIC).
16 Banking organizations that are currently
grandfathered and eligible to include TruPS in tier
1 capital can continue to include TruPS in tier 1
capital under the community bank leverage ratio
framework, subject to existing limits. See 12 CFR
3.20(c)(3) (OCC); 12 CFR 217.20(c)(3) (Board); 12
CFR 324.20(c)(3) (FDIC). See 12 CFR
3.22(c)(2)(iii)(A) (OCC); 12 CFR 217.22(c)(2)(iii)(A)
(Board); 12 CFR 324.22(c)(2)(iii)(A) (FDIC)
urrently
grandfathered and eligible to include TruPS in tier
1 capital can continue to include TruPS in tier 1
capital under the community bank leverage ratio
framework, subject to existing limits. See 12 CFR
3.20(c)(3) (OCC); 12 CFR 217.20(c)(3) (Board); 12
CFR 324.20(c)(3) (FDIC). See 12 CFR
3.22(c)(2)(iii)(A) (OCC); 12 CFR 217.22(c)(2)(iii)(A)
(Board); 12 CFR 324.22(c)(2)(iii)(A) (FDIC). See 12
CFR 217.300(c) (Board).
ratio, a calculation methodology with
which banking organizations are already
familiar, and therefore would streamline
adoption of the community bank
leverage ratio framework. In addition,
the use of tier 1 capital in the
community bank leverage ratio
framework will enhance comparability
among banking organizations and
remove the need for separate qualifying
criteria for MSAs and temporary
difference DTAs, as discussed
previously. Based on the agencies’
analysis, for the majority of banking
organizations with less than $10 billion
in total consolidated assets, the
proposed tangible equity and the
current tier 1 capital figures result in
nearly the same amount of regulatory
capital. Finally, the use of tier 1 capital
as the numerator of the leverage ratio
allows for the incorporation of changes
from the simplifications rule, which
further simplifies the tier 1 capital
calculation by amending the treatment
of MSAs, temporary difference DTAs,
investments in capital instruments, and
minority interests.14
The agencies note that the generally
applicable rule requires deductions
from tier 2 capital related to investments
in capital instruments of unconsolidated
financial institutions when such
investments exceed certain limits and
that such deductions can affect the
calculation of tier 1 capital.15 This
corresponding deduction approach
requires a banking organization to make
deductions from the same component of
capital for which the underlying
instrument would qualify if it was
issued by the banking organization
itself
ments of unconsolidated
financial institutions when such
investments exceed certain limits and
that such deductions can affect the
calculation of tier 1 capital.15 This
corresponding deduction approach
requires a banking organization to make
deductions from the same component of
capital for which the underlying
instrument would qualify if it was
issued by the banking organization
itself. In addition, if a banking
organization does not have a sufficient
amount of a specific regulatory capital
component against which to effect the
deduction, the shortfall must be
deducted from the next higher (that is,
more subordinated) regulatory capital
component. Without any revision to the
corresponding deduction approach, an
electing banking organization with
investments in tier 2 capital instruments
of other financial institutions could
have been required to apply the
corresponding deduction approach
potentially resulting in deductions from
tier 1 capital. Under the final rule,
however, since the community bank
leverage ratio framework does not have
a total capital requirement, an electing
banking organization is neither required
to calculate tier 2 capital nor make any
deductions that would have been taken
from tier 2 capital under the generally
applicable rule. Therefore, if an electing
banking organization has investments in
the capital instruments of an
unconsolidated financial institution that
would qualify as tier 2 capital of the
electing banking organization under the
generally applicable rule (tier 2
qualifying investments), and the
banking organization’s total investments
in the capital of unconsolidated
financial institutions exceed the
threshold for deduction, the banking
organization is not required to deduct
the tier 2 qualifying investments
financial institution that
would qualify as tier 2 capital of the
electing banking organization under the
generally applicable rule (tier 2
qualifying investments), and the
banking organization’s total investments
in the capital of unconsolidated
financial institutions exceed the
threshold for deduction, the banking
organization is not required to deduct
the tier 2 qualifying investments.
An electing banking organization is
only required to make a deduction from
its common equity tier 1 capital or tier
1 capital if the sum of its investments
in the capital of an unconsolidated
financial institution is in a form that
would qualify as common equity tier 1
capital or tier 1 capital instruments of
the electing banking organization and
exceeds the threshold for deduction.
The agencies do not believe this is a
common occurrence and observed that
as of March 31, 2019, very few
community banking organizations made
a deduction from tier 2 capital.
Therefore, the agencies believe it is
appropriate to clarify this aspect of the
tier 1 calculation for qualifying
community banking organizations to
ensure that it can be made as simply as
possible. Further, although the
community bank leverage ratio
framework will not require qualifying
community banking organizations to
make deductions from their regulatory
capital calculations for investments in
tier 2 capital instruments issued by
other financial institutions, the agencies
will continue to monitor such
investments and will address, on a case-
by-case basis, any instances where such
activity potentially creates an unsafe or
unsound practice or condition
ire qualifying
community banking organizations to
make deductions from their regulatory
capital calculations for investments in
tier 2 capital instruments issued by
other financial institutions, the agencies
will continue to monitor such
investments and will address, on a case-
by-case basis, any instances where such
activity potentially creates an unsafe or
unsound practice or condition.
With respect to a banking
organization that has not elected the
community bank leverage ratio
framework but invests in an instrument
(e.g., subordinated debt instrument)
issued by an electing banking
organization that would qualify as tier 2
capital under the generally applicable
rule, the investing banking organization
would continue to treat the instrument
as tier 2 capital notwithstanding the
electing banking organization’s capital
treatment of the instrument.
The agencies believe adoption of tier
1 capital, including the adjustments
described above, also addresses
commenters’ concerns about the
inclusion of TruPS,16 certain other
preferred stock instruments, and
minority interests includable in the
numerator of the leverage ratio
calculation by maintaining the same
treatment that currently applies under
the generally applicable rule’s
calculation for tier 1 capital for non-
advanced approaches banking
organizations.
2. Denominator
Under the proposal and consistent
with the Act, the community bank
leverage ratio denominator would have
been based on a banking organization’s
average total consolidated assets.
Specifically, average total consolidated
assets for purposes of the denominator
would have been calculated in
accordance with the reporting
instructions to Schedules RC–K on the
Call Report or HC–K on Form FR Y–9C,
as applicable, less the items deducted
from the numerator, other than AOCI.
The proposed denominator therefore
would have been similar, but not
identical, to the denominator of the
generally applicable rule’s leverage
ratio
or purposes of the denominator
would have been calculated in
accordance with the reporting
instructions to Schedules RC–K on the
Call Report or HC–K on Form FR Y–9C,
as applicable, less the items deducted
from the numerator, other than AOCI.
The proposed denominator therefore
would have been similar, but not
identical, to the denominator of the
generally applicable rule’s leverage
ratio.
The agencies received a limited
number of comments on the proposed
denominator for the community bank
leverage ratio. A commenter suggested
the agencies consider seasonality in
total assets and allow for the use of four-
quarter average total consolidated assets
for the denominator. The agencies note
that the denominator as proposed would
be average total consolidated assets as
described above, which would have
substantially maintained consistency
with the current regulatory capital
calculation for average total
consolidated assets. Another commenter
asked that the agencies consider
allowing a deduction from the
denominator for pass-through reserve
balances held with the Federal Reserve
System. The commenter argued that
allowing this deduction would refine
this calculation for correspondent
banking organizations to align more
closely their capital requirements to
their risk and would, in the
commenter’s view, not unduly
discourage correspondent banking
organizations from assisting community
banking organization clients with
holding proper reserve balances with
the Federal Reserve System.
The agencies note that the leverage
ratio in the generally applicable rule is
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ommenter’s view, not unduly
discourage correspondent banking
organizations from assisting community
banking organization clients with
holding proper reserve balances with
the Federal Reserve System.
The agencies note that the leverage
ratio in the generally applicable rule is
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Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations
17 As of March 31, 2019, there are 4,261
depository institution holding companies with less
than $10 billion in total consolidated assets. More
than 95 percent of such holding companies are not
subject to the capital rule because they have less
than $3 billion in total consolidated assets and meet
certain additional criteria to qualify for the Board’s
Small Bank Holding Company and Savings and
Loan Holding Company Policy Statement. See 12
CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225,
appendix C; 12 CFR 238.9.
18 84 FR 4222 (February 14, 2019).
designed to be a simple, non-risk-based
on-balance sheet measure. Adjusting the
leverage ratio denominator as
commenters suggested would add
unnecessary complexity to the measure.
Therefore, the agencies are finalizing the
leverage ratio denominator as proposed,
except that items deducted from the
denominator will align with the
deductions from tier 1 capital as the
numerator rather than from the
proposed tangible equity measure as the
numerator.
C. Calibration of the Leverage Ratio in
Order To Qualify for the Community
Bank Leverage Ratio
The agencies proposed to permit a
qualifying community banking
organization to elect to use the
community bank leverage ratio
framework if the organization’s
community bank leverage ratio was
greater than 9 percent at the time of
election
he
proposed tangible equity measure as the
numerator.
C. Calibration of the Leverage Ratio in
Order To Qualify for the Community
Bank Leverage Ratio
The agencies proposed to permit a
qualifying community banking
organization to elect to use the
community bank leverage ratio
framework if the organization’s
community bank leverage ratio was
greater than 9 percent at the time of
election. A qualifying community
banking organization with a community
bank leverage ratio greater than 9
percent would have been considered to
have met: (i) The requirements of the
generally applicable rule; (ii) the well-
capitalized capital ratio thresholds
under the agencies’ PCA framework for
insured depository institutions or the
well-capitalized standards under the
Board’s regulations for holding
companies, as applicable; and (iii) any
other capital or leverage requirements to
which the banking organization is
subject. Such qualifying community
banking organizations would not have
been required to calculate capital ratios
under the generally applicable rule.
Additionally, to have been considered
well capitalized under the proposed
community bank leverage ratio
framework, and consistent with the
agencies’ PCA framework, a qualifying
community banking organization must
not have been subject to any written
agreement, order, capital directive, or
PCA directive to meet and maintain a
specific capital level for any capital
measure.
In general, commenters stated that the
community bank leverage ratio
requirement should be lowered to 8
percent, citing the lower end of the
range of the requirement under section
201 of the Act. Commenters indicated
that such a calibration would more
closely track the current well
capitalized thresholds under PCA and
would allow more banking
organizations to be eligible to use the
community bank leverage ratio
framework
he
community bank leverage ratio
requirement should be lowered to 8
percent, citing the lower end of the
range of the requirement under section
201 of the Act. Commenters indicated
that such a calibration would more
closely track the current well
capitalized thresholds under PCA and
would allow more banking
organizations to be eligible to use the
community bank leverage ratio
framework. Several commenters wrote
that the proposed community bank
leverage ratio requirement and
qualifying criteria were excessively
conservative, particularly combined
with the assumption that the adoption
of CECL would, in the commenters’
view, reduce firms’ regulatory capital
levels. A commenter suggested a
banking organization should have the
option to phase in the impact of the day-
one CECL adjustment recorded in
retained earnings over a five year period
when it elects to use the community
bank leverage ratio framework to
calculate regulatory capital. A few
commenters indicated that the proposed
community bank leverage ratio
calibration would not factor in the
adjusted allowance for credit loss for up
to 1.25 percent of risk-weighted assets,
which would be permitted under the
generally applicable rule for purposes of
the total capital ratio, but would not be
relevant under the community bank
leverage ratio. Finally, a commenter
recommended a dynamic calibration
that would vary depending on the
business cycle to accommodate recovery
and encourage lending in a stressed
environment.
After considering the comments
received on calibration, the agencies
have decided to adopt a 9 percent
leverage ratio as a qualifying criterion
for the community bank leverage ratio
framework
bank
leverage ratio. Finally, a commenter
recommended a dynamic calibration
that would vary depending on the
business cycle to accommodate recovery
and encourage lending in a stressed
environment.
After considering the comments
received on calibration, the agencies
have decided to adopt a 9 percent
leverage ratio as a qualifying criterion
for the community bank leverage ratio
framework. The agencies believe that a
9 percent calibration, with
complementary qualifying criteria for
asset size, off-balance sheet assets, and
trading assets and trading liabilities,
generally maintains the current level of
regulatory capital held by electing
banking organizations and supports the
agencies’ goals of reducing regulatory
burden for as many community banking
organizations as possible. For example,
even though an 8 percent leverage ratio
would have allowed more banking
organizations to opt into the community
bank leverage ratio framework, the
reduced calibration could create an
inappropriate incentive for some
qualifying community banking
organizations to hold less regulatory
capital than they do today. Rather than
lowering the minimum community bank
leverage ratio from 9 percent to 8
percent, the agencies determined that it
would be more appropriate to alleviate
the potential burden associated with
switching regulatory capital frameworks
as capital levels fall by permitting an
electing banking organization to have its
ratio drop below 9 percent temporarily
(i.e., the two-quarter grace period). This
grace period will provide an electing
banking organization time to either
comply with the qualifying criteria or to
prepare to comply with the generally
applicable rule and file the appropriate
regulatory reports
al frameworks
as capital levels fall by permitting an
electing banking organization to have its
ratio drop below 9 percent temporarily
(i.e., the two-quarter grace period). This
grace period will provide an electing
banking organization time to either
comply with the qualifying criteria or to
prepare to comply with the generally
applicable rule and file the appropriate
regulatory reports.
The agencies estimate that, as of the
first quarter of 2019, the vast majority of
banking organizations with under $10
billion in total consolidated assets
would meet the definition of a
qualifying community banking
organization and have a leverage ratio
above 9 percent. Based on reported data
as of March 31, 2019, there are 5,221
insured depository institutions with less
than $10 billion in total consolidated
assets and 231 depository institution
holding companies with less than $10
billion in total consolidated assets that
file the form FR Y–9C.17 The agencies
estimate that approximately 85 percent
of such insured depository institutions
and approximately 76 percent of such
depository institution holding
companies would qualify to use the
community bank leverage ratio
framework under the 9 percent
calibration and other qualifying criteria.
The agencies believe the community
bank leverage ratio framework in this
final rule, including a 9 percent
calibration, meets the objectives
described above.
In February of 2019, the agencies
issued a final rule to amend the
generally applicable rule in response to
CECL (CECL transitions final rule).18
The CECL transitions final rule provides
for an optional three-year transition
arrangement that will allow a banking
organization to phase in any adverse
day-one regulatory capital effects of
CECL adoption on retained earnings,
deferred tax assets, allowance for credit
losses, and average total consolidated
assets. These day-one regulatory capital
effects will be phased in over the
transition period on a straight line basis
des
for an optional three-year transition
arrangement that will allow a banking
organization to phase in any adverse
day-one regulatory capital effects of
CECL adoption on retained earnings,
deferred tax assets, allowance for credit
losses, and average total consolidated
assets. These day-one regulatory capital
effects will be phased in over the
transition period on a straight line basis.
Under this final rule, the leverage ratio
under the community bank leverage
ratio framework is generally calculated
in the same manner as the generally
applicable rule’s leverage ratio.
Accordingly, an electing banking
organization is also eligible to phase-in
any adverse day-one regulatory capital
effects of CECL adoption on retained
earnings, DTAs, allowance for credit
losses, and average total consolidated
assets. Banking organizations will retain
their three-year transition period
without reset (i.e., the transition period
cannot be extended) upon passage in or
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Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations
19 See section I in this SUPPLEMENTARY
INFORMATION for a discussion on the interaction
between the effective date of the final rule and
when a banking organization elects to use the
community bank leverage ratio framework.
out of the community bank leverage
ratio framework.
D. Ability To Opt Into and Out of the
Community Bank Leverage Ratio
Framework
Under the proposal, a qualifying
community banking organization with a
community bank leverage ratio greater
than 9 percent could have elected to use
the community bank leverage ratio
framework at any time. Such a banking
organization would have indicated its
election by completing a community
bank leverage ratio reporting schedule
in its Call Report or Form FR Y–9C, as
applicable
ework
Under the proposal, a qualifying
community banking organization with a
community bank leverage ratio greater
than 9 percent could have elected to use
the community bank leverage ratio
framework at any time. Such a banking
organization would have indicated its
election by completing a community
bank leverage ratio reporting schedule
in its Call Report or Form FR Y–9C, as
applicable. Also, under the proposal, an
electing banking organization would
have been able to opt out of the
community bank leverage ratio
framework and become subject to the
generally applicable rule by completing
the associated reporting requirements
on Schedules RC–R of the Call Report or
HC–R of Form FR Y–9C, as applicable.
Additionally, the agencies noted in the
proposal that an electing banking
organization would have been able to
opt out of the community bank leverage
ratio framework between reporting
periods by providing the capital ratios
under the generally applicable rule to its
appropriate regulators at the time of
opting out. A banking organization that
opted out of the community bank
leverage ratio framework would have
been required to meet the qualifying
criteria included in the definition of a
qualifying community banking
organization and have a community
bank leverage ratio of greater than 9
percent to be able to opt back into the
community bank leverage ratio
framework.
Several commenters suggested that
the optionality aspect should be further
emphasized to both bankers and agency
examiners. These commenters
expressed concern that banking
organizations that do not opt in could be
seen as outliers and could be pressured
to raise capital and opt into the
community bank leverage ratio
framework, or that procedural issues
would make it too difficult in practice
for banking organizations to opt out.
The agencies have considered the
comments and are finalizing the
election to use the community bank
leverage ratio framework as proposed
ations that do not opt in could be
seen as outliers and could be pressured
to raise capital and opt into the
community bank leverage ratio
framework, or that procedural issues
would make it too difficult in practice
for banking organizations to opt out.
The agencies have considered the
comments and are finalizing the
election to use the community bank
leverage ratio framework as proposed.
Due to the adoption of tier 1 capital and
the leverage ratio into the community
bank leverage ratio framework, the
agencies will update accordingly the
proposed reporting changes to the Call
Report and Form FR Y–9C. The agencies
are further clarifying that the
community bank leverage ratio
framework is an optional framework,
based on section 201 of the Act, which
serves the purpose of removing the
burden of calculating and reporting risk-
based capital ratios for banking
organizations that meet certain criteria.
The agencies are also clarifying that a
banking organization can opt out of the
community bank leverage ratio
framework at any time, without
restriction, by reverting to the generally
applicable rule and providing the
capital ratios under the generally
applicable rule to its appropriate
regulators at the time of opting out.
One commenter requested that the
rule require that banking agencies notify
state bank regulators when a state-
chartered electing banking organization
opts out of the framework between
reporting periods. Under the final rule,
a qualifying community banking
organization may opt into or out of the
community bank leverage ratio
framework at any time and for any
reason. The agencies, therefore, are not
including a mandatory notification
requirement in the final rule, as this
could discourage banking organizations
from electing to apply and report under
the generally applicable rule. The
agencies note that the Call Report and
Form FR Y–9C are available to the
public and therefore additional notice is
not necessary
ramework at any time and for any
reason. The agencies, therefore, are not
including a mandatory notification
requirement in the final rule, as this
could discourage banking organizations
from electing to apply and report under
the generally applicable rule. The
agencies note that the Call Report and
Form FR Y–9C are available to the
public and therefore additional notice is
not necessary.
As described above, a banking
organization generally opts into and out
of the community bank leverage ratio
framework through its Call Report or
Form FR Y–9C. As a result, a banking
organization’s compliance with the
community bank leverage ratio
framework or the generally applicable
rule will be determined based upon the
capital framework it has elected in its
last filed Call Report or Form FR Y–
9C.19
E. Ongoing Compliance With the
Community Bank Leverage Ratio
Framework
1. Meeting the Definition of a Qualifying
Community Banking Organization
Under the proposal, an electing
banking organization that no longer met
the proposed qualifying criteria would
have been required, within two
consecutive calendar quarters, either to
meet the qualifying criteria again or to
demonstrate compliance with the
generally applicable rule. During the
proposed grace period, the banking
organization could have continued to be
treated as a qualifying community
banking organization and could have,
therefore, continued calculating and
reporting a community bank leverage
ratio to determine its compliance with
other statutes and regulations.
The agencies did not receive specific
comments relating to the mechanics of
the proposed grace period. One
commenter argued that a six-month
transition period would be too short for
banking organizations to sell MSAs, if
necessary, or prepare for the different
treatment in the generally applicable
rule. Other commenters noted that the
use of tier 1 capital would ease any
transition back to the risk-based capital
requirements
comments relating to the mechanics of
the proposed grace period. One
commenter argued that a six-month
transition period would be too short for
banking organizations to sell MSAs, if
necessary, or prepare for the different
treatment in the generally applicable
rule. Other commenters noted that the
use of tier 1 capital would ease any
transition back to the risk-based capital
requirements. The agencies continue to
believe that this limited grace period is
appropriate to mitigate potential
volatility in capital and associated
regulatory reporting requirements based
on temporary changes in a banking
organization’s risk profile from quarter
to quarter, while capturing more
permanent changes in risk profile, and
are therefore finalizing the two-quarter
grace period largely as proposed. Under
the final rule, the grace period begins as
of the end of the calendar quarter in
which the electing banking organization
ceases to satisfy any of the qualifying
criteria and will end after two
consecutive calendar quarters. For
example, if the electing banking
organization no longer meets one of the
qualifying criteria as of February 15, and
still does not meet the criteria as of the
end of that quarter, the grace period for
such a banking organization will begin
as of the end of the quarter ending
March 31. The banking organization
may continue to use the community
bank leverage ratio framework as of June
30, but will need to comply fully with
the generally applicable rule (including
the associated reporting requirements)
as of September 30, unless the banking
organization once again meets all
qualifying criteria of the community
bank leverage ratio framework,
including a leverage ratio of greater than
9 percent, by that date.
Under the proposal, an electing
banking organization that ceased to
meet the qualifying criteria as a result of
a business combination would have
received no grace period and
immediately would have been required
to revert to the generally applicable rule
qualifying criteria of the community
bank leverage ratio framework,
including a leverage ratio of greater than
9 percent, by that date.
Under the proposal, an electing
banking organization that ceased to
meet the qualifying criteria as a result of
a business combination would have
received no grace period and
immediately would have been required
to revert to the generally applicable rule.
The agencies continue to believe this
approach is appropriate, as banking
organizations would need to consider
the regulatory capital implications of a
planned business combination and be
prepared to comply with the applicable
requirements. An electing banking
organization that expects that it would
not meet the qualifying criteria as a
result of a business combination would
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Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations
20 Under the proposal, an electing banking
organization that is a depository institution holding
company would no longer be considered well
capitalized if the holding company had a
community bank leverage ratio of 9 percent or less.
21 See, e.g., 12 U.S.C. 5371 (establishing a capital
floor for insured depository institutions and
depository institution holding companies); section
201 of the Act (requiring development of a
community bank leverage ratio for which a
depository institution exceeding that ratio would be
considered to meet the requirements to be treated
as well capitalized under PCA); 12 U.S.C. 1831o
(PCA).
need to provide its pro forma capital
ratios under the generally applicable
rule to its appropriate regulator as part
of its merger application, if applicable,
and fully comply with the generally
applicable rule for the regulatory
reporting period during which the
transaction is completed.
2
ed to meet the requirements to be treated
as well capitalized under PCA); 12 U.S.C. 1831o
(PCA).
need to provide its pro forma capital
ratios under the generally applicable
rule to its appropriate regulator as part
of its merger application, if applicable,
and fully comply with the generally
applicable rule for the regulatory
reporting period during which the
transaction is completed.
2. Treatment of a Community Banking
Organization That Falls Below Certain
Leverage Ratio Levels
Under the proposal, an electing
banking organization that had a
community bank leverage ratio greater
than 9 percent would have been
considered well capitalized. In addition,
an electing banking organization would
have been considered to have met the
minimum capital requirements under
the generally applicable rule if its
community bank leverage ratio was 7.5
percent or greater.20 Under the proposal,
an electing banking organization could
have chosen to stop using the
community bank leverage ratio
framework and instead become subject
to the generally applicable rule. The
proposal also provided an electing
banking organization with a declining
community bank leverage ratio (e.g.,
below 9 percent) with the option to
remain in the community bank leverage
ratio framework indefinitely, rather than
requiring the firm to revert to the
generally applicable rule. Under the
proposal, an electing banking
organization that was an insured
depository institution and no longer
exceeded the 9 percent community bank
leverage ratio would have been subject
to community bank leverage ratio levels
that would serve as proxies for the
adequately capitalized,
undercapitalized, and significantly
undercapitalized PCA capital
categories.21
The agencies received comments and
requests for clarification regarding both
the proposed PCA proxy levels and the
grace period for a banking organization
that has a community bank leverage
ratio at or below 9 percent
unity bank leverage ratio levels
that would serve as proxies for the
adequately capitalized,
undercapitalized, and significantly
undercapitalized PCA capital
categories.21
The agencies received comments and
requests for clarification regarding both
the proposed PCA proxy levels and the
grace period for a banking organization
that has a community bank leverage
ratio at or below 9 percent. One
commenter requested that the agencies
clarify when PCA consequences begin to
apply. Another commenter indicated
that the framework should require a
banking organization that falls below
the well-capitalized level to
immediately begin reporting capital
ratios under the generally applicable
rule. Another commenter proposed that,
instead of instituting the PCA proxy
levels, the agencies should give
qualifying banking organizations with a
community bank leverage ratio between
8 percent and 9 percent a two-quarter
grace period after which they would
either need to restore their community
bank leverage ratio to greater than 9
percent or revert to the generally
applicable rule.
The agencies also received comments
in response to the proposal’s
incorporation of community bank
leverage ratio levels as proxies for the
adequately capitalized,
undercapitalized, and significantly
undercapitalized PCA categories. In
general, commenters noted that the
establishment of a new, separate PCA
framework within the community bank
leverage ratio framework is not
necessary or required under section 201
of the Act, expressing concern that the
community bank leverage ratio
framework could, in the future, function
as the new, de facto minimum capital
requirement, particularly if it is difficult
for a banking organization to switch
back to the generally applicable rule
, separate PCA
framework within the community bank
leverage ratio framework is not
necessary or required under section 201
of the Act, expressing concern that the
community bank leverage ratio
framework could, in the future, function
as the new, de facto minimum capital
requirement, particularly if it is difficult
for a banking organization to switch
back to the generally applicable rule.
Commenters also noted community
banking organizations’ sensitivity to
several restrictions that could arise if
the community banking organization is
determined to be less than well
capitalized, including restrictions on
funding sources such as limits on
brokered deposits, and the inability to
open branches or make acquisitions.
Some commenters suggested alternative
calibration levels for the PCA proxy
levels.
In response to commenter concerns
regarding the proposed PCA proxy
levels for electing banking organizations
that no longer exceed a 9 percent
leverage ratio, the agencies decided not
to incorporate the proposed PCA proxy
levels in the final rule. Therefore, under
the final rule, banking organizations that
are insured depository institutions and
that have a leverage ratio of greater than
9 percent are deemed to have met the
well capitalized capital ratio
requirements for PCA purposes. Further,
the agencies included the requirement
to have a leverage ratio greater than 9
percent as a qualifying criterion in the
definition of a qualifying community
banking organization. Consequently, the
two-quarter grace period described
above also applies depending on the
level of an electing banking
organization’s leverage ratio. Under the
final rule, an electing banking
organization that has a leverage ratio
that is greater than 8 percent and equal
to or less than 9 percent is allowed a
two-quarter grace period after which it
must either (i) again meet all qualifying
criteria or (ii) apply and report the
generally applicable rule
pplies depending on the
level of an electing banking
organization’s leverage ratio. Under the
final rule, an electing banking
organization that has a leverage ratio
that is greater than 8 percent and equal
to or less than 9 percent is allowed a
two-quarter grace period after which it
must either (i) again meet all qualifying
criteria or (ii) apply and report the
generally applicable rule. During this
two-quarter period, a banking
organization that is an insured
depository institution and that has a
leverage ratio that is greater than 8
percent would be considered to have
met the well-capitalized capital ratio
requirements for PCA purposes. An
electing banking organization with a
leverage ratio of 8 percent or less is not
eligible for the grace period and must
comply with the generally applicable
rule, i.e., for the quarter in which the
banking organization reports a leverage
ratio of 8 percent or less. An electing
banking organization experiencing or
anticipating such an event would be
expected to notify its primary federal
supervisory agency, which would
respond as appropriate to the
circumstances of the banking
organization.
A commenter asked that the proposed
rule be revised to provide expressly that
for an otherwise qualifying community
bank that is state chartered to be
disqualified from using the community
bank leverage ratio framework based on
criteria other than the enumerated
qualifying criteria, such a determination
must be made jointly by (1) the bank’s
primary federal banking supervisory
agency (either the FDIC or the Board)
and (2) the appropriate state bank
supervisor. The agencies expect to
continue to work closely with the state
bank supervisors, particularly with
respect to institutions that are
supervised jointly
n
criteria other than the enumerated
qualifying criteria, such a determination
must be made jointly by (1) the bank’s
primary federal banking supervisory
agency (either the FDIC or the Board)
and (2) the appropriate state bank
supervisor. The agencies expect to
continue to work closely with the state
bank supervisors, particularly with
respect to institutions that are
supervised jointly. However, the
agencies are not revising the rule to
require a joint determination of the
federal supervisor and the state
supervisor because such a requirement
could prevent the federal supervisor
from applying the capital standards it
believes to be appropriate.
Finally, a commenter requested
clarification that a bank that is a
qualifying community bank may elect to
use the community banking
organization leverage ratio framework
even if its parent holding company is
not a qualifying community banking
organization, or vice versa. Consistent
with the proposal, a non-advanced
approaches subsidiary insured
depository institution may opt into the
community bank leverage ratio
framework even if its parent holding
company is not a qualifying banking
organization, and vice versa. The
agencies do not have safety and
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61787
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22 The OCC and FDIC submitted their information
collections to OMB at the proposed rule stage.
However, these submissions were done solely in an
effort to apply a conforming methodology for
calculating the burden estimates and not due to the
proposed rule. OMB filed comments requesting that
the agencies examine public comment in response
to the proposed rule and describe in the supporting
statement of its next collection any public
comments received regarding the collection as well
as why (or why it did not) incorporate the
commenter’s recommendation
onforming methodology for
calculating the burden estimates and not due to the
proposed rule. OMB filed comments requesting that
the agencies examine public comment in response
to the proposed rule and describe in the supporting
statement of its next collection any public
comments received regarding the collection as well
as why (or why it did not) incorporate the
commenter’s recommendation. In addition, OMB
requested that the OCC and the FDIC note the
convergence of the agencies on the single
methodology. The agencies received no comments
on the information collection requirements. Since
the proposed rule stage, the agencies have
conformed their respective methodologies in a
separate final rulemaking titled, Regulatory Capital
Rule: Implementation and Transition of the Current
Expected Credit Losses Methodology for Allowances
and Related Adjustments to the Regulatory Capital
Rule and Conforming Amendments to Other
Regulations, 84 FR 4222 (February 14, 2019), and
the FDIC and OCC have had their submissions
approved through OMB. As a result, the agencies’
information collections related to the regulatory
capital rules are currently aligned and therefore no
submission will be made to OMB.
23 U.S. SBA, Table of Small Business Size
Standards Matched to North American Industry
Classification System Codes, available at https://
Continued
soundness concerns with these
scenarios and the agencies intended to
allow such elections in the proposal.
F. FDIC Deposit Insurance Assessments
Regulations
The FDIC’s deposit insurance
assessments regulations also would be
affected by the finalized community
bank leverage ratio framework. The
FDIC is considering, and is expected to
adopt, a separate final rule to apply the
community bank leverage ratio
framework to the deposit insurance
assessment system
llow such elections in the proposal.
F. FDIC Deposit Insurance Assessments
Regulations
The FDIC’s deposit insurance
assessments regulations also would be
affected by the finalized community
bank leverage ratio framework. The
FDIC is considering, and is expected to
adopt, a separate final rule to apply the
community bank leverage ratio
framework to the deposit insurance
assessment system. The separate final
rule amends the FDIC’s assessment
regulations to price all qualifying
community banks that elect to use the
community bank leverage ratio
framework as small banks, and
continues to use the leverage ratio to
determine assessment rates for
established small banks. The separate
final rule additionally clarifies that an
electing bank that meets the definition
of a custodial bank will have no change
to its custodial bank deduction or
reporting items required to calculate the
deduction, and makes technical
amendments to ensure that the
assessment regulations continue to
reference the PCA regulations for the
definitions of capital categories used in
the deposit insurance assessment
system. Because the leverage ratio in
this final rule is the same leverage ratio
currently being used for assessment
purposes, the separate final rule does
not modify the FDIC’s assessment
methodology. The FDIC does not expect
that any changes to its deposit insurance
assessment regulations pursuant to this
separate final rule will have a material
impact on aggregate assessment revenue
or on rates paid by individual
institutions.
G. Other Affected Regulations
Under the final rule, the community
bank leverage ratio framework
incorporates tier 1 capital. Therefore,
Federal banking regulations outside of
the regulatory capital rule (non-capital
rules) can continue to reference tier 1
capital. The final rule amends standards
referencing total capital so that an
electing banking organization uses tier 1
capital instead of total capital
Regulations
Under the final rule, the community
bank leverage ratio framework
incorporates tier 1 capital. Therefore,
Federal banking regulations outside of
the regulatory capital rule (non-capital
rules) can continue to reference tier 1
capital. The final rule amends standards
referencing total capital so that an
electing banking organization uses tier 1
capital instead of total capital. The final
rule amends standards referencing risk-
weighted assets so that an electing
banking organization uses average total
consolidated assets (i.e., the
denominator of the leverage ratio)
instead of risk-weighted assets.
In addition, certain of the agencies’
non-capital rules refer to ‘‘capital stock
and surplus’’ (or similar items) which is
generally defined as tier 1 capital and
tier 2 capital plus the amount of
allowances for loan and lease losses not
included in tier 2 capital. The final rule
amends standards referencing ‘‘capital
stock and surplus’’ (or similar items) so
that an electing banking organization
uses tier 1 capital plus allowances for
loan and lease losses (or adjusted
allowance for credit losses, as
applicable). Thus, for example, for
purposes of compliance with section
23A of the Federal Reserve Act, the
Board’s Regulation W should provide
that for an electing banking organization
‘‘capital stock and surplus’’ means tier
1 capital plus allowances for loan and
lease losses (or adjusted allowance for
credit losses, as applicable).
H. Effective Date of the Final Rule
The final rule will be effective as of
January 1, 2020, and banking
organizations can utilize the community
bank leverage ratio framework for
purposes of filing their Call Report or
Form FR Y–9C, as applicable, for the
first quarter for 2020 (i.e., as of March
31, 2020)
or loan and
lease losses (or adjusted allowance for
credit losses, as applicable).
H. Effective Date of the Final Rule
The final rule will be effective as of
January 1, 2020, and banking
organizations can utilize the community
bank leverage ratio framework for
purposes of filing their Call Report or
Form FR Y–9C, as applicable, for the
first quarter for 2020 (i.e., as of March
31, 2020). A banking organization’s
compliance with capital requirements
for a quarter prior to the final rule’s
effective date shall be determined
according to the agencies’ generally
applicable rule until the institution has
filed their Call Report Form or FR Y–9C,
as applicable, for the first quarter of
2020 and has indicated whether or not
it has elected the community bank
leverage ratio framework.
IV. Regulatory Analyses
A. Paperwork Reduction Act
The agencies’ capital rule contains
‘‘collections of information’’ within the
meaning of the Paperwork Reduction
Act (PRA) of 1995 (44 U.S.C. 3501–
3521). In accordance with the
requirements of the PRA, the agencies
may not conduct or sponsor, and the
respondent is not required to respond
to, an information collection unless it
displays a currently-valid Office of
Management and Budget (OMB) control
number. The OMB control number for
the OCC is 1557–0318, Board is 7100–
0313, and FDIC is 3064–0153. The
information collections that are part of
the agencies’ capital rule will not be
affected by this final rule and therefore
no final submissions will be made by
the FDIC or OCC to OMB under section
3507(d) of the PRA (44 U.S.C. 3507(d))
and section 1320.11 of the OMB’s
implementing regulations (5 CFR 1320)
in connection with this rulemaking.22
The agencies note that firms that elect
to be subject to the community bank
leverage ratio framework will become
exempt from certain collections of
information that are part of the agencies’
regulatory capital rule
or OCC to OMB under section
3507(d) of the PRA (44 U.S.C. 3507(d))
and section 1320.11 of the OMB’s
implementing regulations (5 CFR 1320)
in connection with this rulemaking.22
The agencies note that firms that elect
to be subject to the community bank
leverage ratio framework will become
exempt from certain collections of
information that are part of the agencies’
regulatory capital rule. Because of
uncertainty regarding the number of
firms that will elect to use the
community bank leverage ratio
framework, the agencies have not
revised their estimates regarding the
annual burden hours associated with
such collections of information to
account for elections to use the
community bank leverage ratio
framework. The agencies will reassess
the annual burden hours associated
with these information collections once
there is more certainty regarding
community bank leverage ratio
elections.
The final rule will also require
changes to the Consolidated Reports of
Condition and Income (Call Reports)
(FFIEC 031, FFIEC 041, and FFIEC 051)
and the Consolidated Financial
Statements for Holding Companies (FR
Y–9C; OMB No. 7100–0128 (Board)),
which will be addressed in one or more
separate Federal Register notices.
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., requires an
agency either to provide a final
regulatory flexibility analysis with a
final rule for which a general notice of
proposed rulemaking is required or to
certify that the final rule will not have
a significant economic impact on a
substantial number of small entities.
The U.S. Small Business Administration
(SBA) establishes size standards that
define which entities are small
businesses for purposes of the RFA.23
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required or to
certify that the final rule will not have
a significant economic impact on a
substantial number of small entities.
The U.S. Small Business Administration
(SBA) establishes size standards that
define which entities are small
businesses for purposes of the RFA.23
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www.sba.gov/sites/default/files/files/Size_
Standards_Table.pdf.
24 See 13 CFR 121.201.
25 See ‘‘A Guide for Government Agencies; How
to Comply with the Regulatory Flexibility Act,’’ pp.
18–20 (Aug. 2017), available at https://
www.sba.gov/sites/default/files/advocacy/How-to-
Comply-with-the-RFA-WEB.pdf.
26 The OCC bases its estimate of the number of
small entities on the SBA’s size thresholds for
commercial banks and savings institutions, and
trust companies, which are $600 million and $41.5
million, respectively. Consistent with the General
Principles of Affiliation 13 CFR 121.103(a), the OCC
counts the assets of affiliated financial institutions
when determining if the OCC should classify an
OCC-supervised institution a small entity. The OCC
uses December 31, 2017, to determine size because
a ‘‘financial institution’s assets are determined by
averaging the assets reported on its four quarterly
financial statements for the preceding year.’’ See
footnote 8 of the U.S. Small Business
Administration’s Table of Size Standards.
27 The agencies intend to separately seek
comment on the proposed changes to regulatory
filings for qualifying community banking
organizations that elect to use the community bank
leverage ratio framework.
28 To estimate wages, the OCC reviewed May
2018 data for wages (by industry and occupation)
from the U.S. Bureau of Labor Statistics (BLS) for
credit intermediation and related activities
excluding non-depository credit intermediaries
(NAICS 5220A1)
d changes to regulatory
filings for qualifying community banking
organizations that elect to use the community bank
leverage ratio framework.
28 To estimate wages, the OCC reviewed May
2018 data for wages (by industry and occupation)
from the U.S. Bureau of Labor Statistics (BLS) for
credit intermediation and related activities
excluding non-depository credit intermediaries
(NAICS 5220A1). To estimate compensation costs
associated with the rule, the OCC uses $114 per
hour, which is based on the average of the 90th
percentile for nine occupations adjusted for
inflation (2.8 percent as of Q1 2019, according to
the BLS), plus an additional 33.2 percent for
benefits (based on the percent of total compensation
allocated to benefits as of Q4 2018 for NAICS 522:
Credit intermediation and related activities).
29 See 13 CFR 121.201. Effective August 19, 2019,
the Small Business Administration revised the size
standards for banking organizations to $600 million
in assets from $550 million in assets. 84 FR 34261
(July 18, 2019).
30 In general, the Board’s capital rule only applies
to bank holding companies and savings and loan
holding companies that are not subject to the
Board’s Small Bank Holding Company and Savings
and Loan Holding Company Policy Statement,
which applies to bank holding companies and
savings and loan holding companies with less than
$3 billion in total assets that also meet certain
additional criteria. Very few bank holding
companies and savings and loan holding companies
that are small entities would be impacted by the
final rule because very few such entities are subject
to the Board’s capital rule.
Under regulations issued by the SBA,
the size standard to be considered a
small business for banking entities
subject to the proposed rule is $600
million or less in consolidated assets.24
Under 5 U.S.C
olding
companies and savings and loan holding companies
that are small entities would be impacted by the
final rule because very few such entities are subject
to the Board’s capital rule.
Under regulations issued by the SBA,
the size standard to be considered a
small business for banking entities
subject to the proposed rule is $600
million or less in consolidated assets.24
Under 5 U.S.C. 605(b), this analysis is
not required if an agency certifies that
the rule will not have a significant
economic impact on a substantial
number of small entities and publishes
its certification and a brief explanatory
statement in the Federal Register along
with its rule.
Pursuant to the RFA, the OCC
specifically considers (a) whether the
final rule is likely to impact a
substantial number of sm

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FDIC_FIL20011. Check the current official text before relying on it. Not legal advice.