- Federal regulators (FDIC, Fed, and OCC) propose lowering the Community Bank Leverage Ratio requirement from 9% to 8% to expand use of the simplified capital framework.
- The proposal would extend the noncompliance grace period from two quarters to four, with a limit of eight quarters used in any prior 20.
- About 475 more community banks would qualify under the 8% threshold, bringing eligibility to roughly 95% of such institutions.
- Regulators say capital safeguards would remain comparable to risk-based rules, though some warn broader eligibility could admit higher-risk banks.
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The regulators’ proposed revision of the CBLR framework represents a calculated easing of regulatory capital burden for small banks while attempting to balance safety and soundness. The 1 percentage point reduction of the leverage requirement to 8% is the statutory floor under section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act; it matches calls from trade groups and reflects recognition of the current 9% level being a barrier to broader participation.
Extending the grace period from two to four quarters offers benefits of flexibility, enabling banks to cope with short-term dips – provided they maintain a minimum leverage ratio of 7% during the grace period. However, the cap on usage of the grace period (up to eight of prior 20 quarters) limits potential for abuse of this flexibility.
The eligibility expansion—with an estimated 14-to-15% increase in eligible banks—means many institutions now just above the threshold of eligibility under the risk profiles (e.g., leverage ratios between 8-9%) would now cross into a simpler, less costly regime. But adoption remains uncertain, as only around 40% of eligible community banks had opted in as of early 2025. The buffer provided by lowering the threshold may improve adoption, but inertia, risk aversion, and operational cost of transition likely remain impediments.
Strategically, this reform could free up regulatory capital in many smaller banks, possibly increasing their lending capacity—particularly in underserved or agriculturally intensive regions. It also reduces compliance and reporting costs, potentially allowing banks to shift resources into growth, technology, or competition with non-banks. On the other hand, it raises questions about risk differentiation: whether banks with higher nontraditional or off-balance sheet exposures or weaker internal controls might become eligible without commensurate risk-buffering. There is also political/regulatory risk if economic stress reveals undercapitalization in banks that took on risk assuming more relaxed standards.
Beyond what’s proposed, some observers suggest further reforms: raising the asset-threshold eligibility above the current $10 billion cap to include more banks; or eliminating or modifying non-statutory qualifiers (e.g., off-balance sheet exposure limits, trading asset/liability caps) to further simplify. These could be the next frontier depending on both feedback to the proposal and broader legislative action.
Open questions include: whether adoption will meaningfully increase (if banks perceive enough relief to make opting-in advantageous); how this interacts with rising interest rates and macroeconomic stress; whether the agencies will enforce stricter supervisory oversight over higher-risk participants; and how the proposal will fare through public comment and final rulemaking, particularly as it may affect capital levels in systemic scenarios.
Supporting Notes
- The proposal would lower the CBLR requirement from 9% to 8% for qualifying community banking organizations.
- Grace period extended from two quarters to four quarters for banks falling short of qualifying criteria—but limited to eight quarters in prior twenty.
- Eligibility remains for banks with under $10 billion in assets, non-advanced approaches banks, meeting risk profile qualifiers.
- An estimated 475 additional community banks would become eligible under the 8% threshold (representing roughly 14-15% increase in eligible institutions), bringing eligibility to about 95% of community banking organizations.
- Median leverage ratio among participating CBLR banks is about 11.8% (2.8 points above current requirement), providing buffer under the existing framework.
- Participating banks that fall below eligibility must maintain at least 7% leverage to remain in grace period.
- As of early 2025, only roughly 40% of the eligible community banks had opted into the CBLR framework.
- The proposed changes are required under legislative authority, specifically Section 201 of EGRRCPA.