Federal Reserve Board – Agencies issue proposal to enhance community banks’ ability to serve their communities while maintaining strong capital requirements

The federal bank regulatory agencies today invited public comment on a proposal that would implement changes to the community bank leverage ratio framework in accordance with statutory authority. By incorporating these changes, the revisions would reduce regulatory burden and provide community banks with greater flexibility and optionality in their capital management approach. The proposal reflects a deeper understanding of the unique business models, risk profiles, and operational realities of community banks. These tailored modifications represent a necessary step in continuing to focus attention on the unique needs of community banks in today’s financial landscape.

The community bank leverage ratio, adopted in 2019, simplifies regulatory capital requirements for community banks by allowing them to adopt a relatively simple leverage ratio to measure capital adequacy. A bank that opts into the framework is not required to calculate and report risk-based capital ratios.

The proposal would lower the community bank leverage ratio requirement to eight percent from the current nine percent. The proposal would also extend the grace period, from two quarters to four quarters, for a community bank that opts into the framework and falls out of compliance to come back into compliance.

The proposal would continue to require a level of capital that is consistent with ensuring the safety and soundness of community banks and comparable to–or higher than–the amount required under the risk-based capital framework. It would also maintain a leverage ratio that is double the minimum leverage ratio applicable to community banks that do not opt into the framework.

These changes demonstrate the agencies’ ongoing commitment to focusing attention on community banks and their vital role in local economies, while ensuring appropriate safeguards remain in place. The proposed modifications provide community banks with enhanced options to manage their regulatory obligations while maintaining their ability to serve their communities.

Comments on the proposal are due 60 days after publication in the Federal Register.