OCC Bulletin 2019-55 | November 13, 2019

Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations

To

Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, All Examining Personnel, and Other Interested Parties

Summary

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) published a final rule in the Federal Register on November 13, 2019, that will provide a simplified measure of capital adequacy for qualifying community banking organizations. Banks that meet the qualifying criteria, including maintaining a leverage ratio greater than 9 percent, and elect to use the community bank leverage ratio framework will be considered to have met the capital requirements for the “well capitalized” category under the agencies’ prompt corrective action (PCA) framework and will no longer be subject to the generally applicable capital rule.

The final rule is effective January 1, 2020. Banks that meet the qualifying criteria can elect to use the community bank leverage ratio framework as of the call report for the quarter ending March 31, 2020.

The agencies have also published a community bank guide to help community banking organizations better understand the optional framework.

Note for Community Banks

This final rule applies to qualifying community banks, which include national banks and federal savings associations with less than $10 billion in total consolidated assets that meet other prudential criteria and opt into the community bank leverage ratio framework.

A link to the agencies’ community bank guide is provided below.

Highlights

The community bank leverage ratio framework is a simple alternative methodology to measure capital adequacy for qualifying community banking organizations. The final rule provides material regulatory burden relief while maintaining safety and soundness in the banking system.

A qualifying community banking organization that opts into the community bank leverage ratio framework and maintains a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) greater than 9 percent will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the PCA framework, and any other capital or leverage requirements to which the qualifying community banking organization is subject.

To be considered a qualifying community banking organization and opt into the community bank leverage ratio framework, a bank must not be an advanced approaches banking organization and must meet all of the following requirements:

A leverage ratio of greater than 9 percent
Average total consolidated assets of less than $10 billion
Off-balance-sheet exposures (excluding unconditionally cancellable commitments and derivatives other than sold credit derivatives) of 25 percent or less of total consolidated assets
Total trading assets and trading liabilities of 5 percent or less of total consolidated assets

For banks that elect to use the community bank leverage ratio framework but no longer meet all of the qualifying criteria, the final rule provides a two-quarter grace period, during which a bank can continue to use the community bank leverage ratio framework if it maintains a leverage ratio greater than 8 percent. The grace period provides banks time to return to compliance with the qualifying criteria or move to the generally applicable capital rule. During this two-quarter period, a bank with a leverage ratio that is greater than 8 percent will still be considered to have met the well capitalized requirements for PCA purposes. If the bank’s leverage ratio falls to 8 percent or less, it will no longer be eligible for the grace period and must comply with the generally applicable capital rule immediately and file regulatory reports consistent with the generally applicable capital rule as of the quarter in which it would report a leverage ratio of 8 percent or less.

Background

The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was enacted on May 24, 2018. Section 201 of the EGRRCPA, “Capital Simplification for Qualifying Community Banks,” directs the agencies to develop a community bank leverage ratio for qualifying community banking organizations, with qualifying criteria based on the banking organization’s risk profile.

Further Information

Please contact JungSup Kim, Risk Specialist, Capital Policy Division, at (202) 649-6370; or Carl Kaminski, Special Counsel, Daniel Perez, Senior Attorney, or Rima Kundnani, Senior Attorney, Chief Counsel’s Office, at (202) 649-5490.

Jonathan V. Gould
Senior Deputy Comptroller and Chief Counsel