This week, we interviewed Mike Townsley, CSBS Policy Counsel, to discuss what a leverage ratio is and why a proposed leverage ratio for community banks still needs some work.
What we learned in today's podcast:
- First, that banks use both a simple leverage ratio and a risk-weighted asset ratio. The risk-weighted asset ratio is complicated.
- While capital, the numerator of the ratio, is somewhat straightforward, risk-weighted assets, the denominator, has become increasingly complicated over time. Small banks who do not have the same risk profile as large banks are facing a compliance challenge when they are calculating their risk-weighted assets.
- Congress noticed this problem and passed legislation, as part of a broader package, asking regulators to make a new “Community Bank Leverage Ratio.” The promise is that, if a community bank holds a high level of capital, they will no longer need to calculate their risk-weighted assets. The intent was to reduce burden.
- However, if a small bank falls below this new leverage ratio requirement of 9%, they will either need to revert back to the risk-weighted asset calculation, or they will face prompt corrective action and get reigned in by regulators.
- CSBS is concerned that, should a bank choose to follow this new leverage ratio, it will become increasingly difficult to switch back to the risk-weighted capital ratio if necessary. Not only will they need to calculate the more burdensome leverage ratio, they will have to start over from scratch and may not have the same compliance staff and knowledge they once had.
- CSBS is working with state and federal regulators to find a solution that either allows community banks time to return to compliance with the new community bank leverage ratio, or provide community banks with the appropriate amount of time and assistance to return to the more complicated asset calculation.
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Community bankers are concerned that the Current Expected Credit Loss (CECL) standard, which is intended to address delays in the recognition of loan losses, will complicate collection of data on loan quality.
Although this rule will not be fully implemented across banks for several years, the majority of banks surveyed by CSBS in 2018 said they were already preparing for it.
“Implementation of CECL is overly complex and far-overreaching for an institution as noncomplex as ours,” one surveyed banker said. “The burden and the cost of CECL may have an impact on an institution’s willingness to lend in the future. It is virtually impossible to administer absent highly advanced and expensive experts or systems.”
The survey, which this year included 521 community banks from 37 states, is released each year at the Community Banking in the 21st Century research and policy conference. The same question about CECL will be asked in the 2019 survey, providing insight into progress on CECL preparedness.
In addition to regulatory compliance, the CSBS annual survey asked questions about trends in small business and other lending, banking services, mergers and acquisitions and management succession.
To read the full 2018 survey, click here.
FDIC on CBLR. In a speech this week, FDIC Chairman Jelena McWilliams addressed the policy debate involving the proposed Community Bank Leverage Ratio (see CSBS podcast above). The key segment: "In November, we joined with the Federal Reserve and OCC on a proposal to give qualifying community banks the option to calculate a simple leverage ratio, rather than multiple measures of capital adequacy...We proposed a definition of tangible equity that is simple to calculate and includes high-quality, loss-absorbing capital. The agencies estimate that more than 80 percent of community banks will be eligible for the CRLR....We are also working with our fellow banking regulators on ways to tailor the risk-based capital rules for community banks that do not qualify for the CBLR, recognizing that the risk-based regimes should be simpler. We are focusing on the capital ratios and buffers community banks are subject to, and will revisit some of the more complicated calculations and risk-weightings currently required."
Let’s Take A Pause. Several media outlets reported on statements by the Federal Reserve Chairman, Jerome Powell, that interest rates are not likely to go up in the near future. The Wall Street Journal summarized the Fed’s decision-making: “Flexibility is emerging as the hallmark of Jerome Powell’s response to the first economic curveball he has faced during his tenure as Federal Reserve chairman. On two fronts—interest rates and the Fed’s asset portfolio—Mr. Powell has abruptly changed course in just three months. In doing so, Mr. Powell is showing he cares more about crafting what he thinks is the right policy than winning an argument with either markets or economists.”
Mo(o)re on the Fed. Bloomberg reported that the White House intends to nominate Stephen Moore, a visiting fellow at the Heritage Foundation, to become a Governor on the Federal Reserve Board. Moore would fill one of the two remaining vacancies on the Board.
CFPB Seeks Advice. In a move to expand the role of advisory panels, CFPB Director Kathy Kraninger announced this week that advisory panels gathering views of consumers, community banks, credit unions and academics will have a more active meeting schedule. Per the CFPB announcement: “The committees’ will expand their focus to broad policy matters and increase the frequency of in-person meetings from two times a year to three times a year.” Politico Pro noted that expanding the role of advisory panels represents a shift in policy for CFPB.
CRA Reform in Sight? That’s the question American Banker posed this week, following recent remarks by FDIC's McWilliams and Federal Reserve Board Governor Lael Brainard. Per American Banker, McWilliams’ focus is to “clarify what activities qualify for CRA credit, assess the role of digital banks…and ensure that CRA investments go to entities in most need of credit.” The import of all this? “Now that the FDIC and Fed are publicly weighing in, observers said they are beginning to see consistent themes — such as having a more tailored, clear measurement for banks — that could lead to interagency agreement on changes to a law that has long been fraught with controversy."
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