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    US Agencies Simplify Capital Calculation Rules for Banks

    October 29, 2019

    US Agencies (FDIC, FED, and OCC) published a final rule, effective January 01, 2020, that introduces an optional simplified measure of capital adequacy. As part of this measure, certain qualifying community banks will be eligible to opt into the community bank leverage ratio (CBLR) framework. The agencies also published a compliance guide to help community banking organizations understand the CBLR framework. In addition, the US Agencies published a final rule that permits non-advanced approaches banking organizations to use the simpler regulatory capital requirements for certain instruments when measuring their tier 1 capital as of January 01, 2020, instead of on the previous effective date of April 01, 2020. These simpler capital requirements relate to mortgage-servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and the calculation of minority interest. Banking organizations may use this new measure of tier 1 capital under the CBLR framework.

    The final rule on CBLR framework 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 (EGRRCP) Act. Under this rule, depository institutions and depository institution holding companies that have less than USD 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%, will be eligible to opt into the CBLR framework. The qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% 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 on CBLR 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% leverage ratio requirement, generally, would still be deemed well-capitalized as long as the banking organization maintains a leverage ratio greater than 8%. The final rule will require changes to the Consolidated Reports of Condition and Income (FFIEC 031, FFIEC 041, and FFIEC 051) and the Consolidated Financial Statements for Holding Companies (FR Y–9C; OMB No. 7100-0128), which will be addressed in one or more separate Federal Register notices.

    The capital simplifications rule simplifies, for non-advanced approaches banking organizations, the calculation for the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties (sometimes referred to as a minority interest) that is "includable" in regulatory capital. The simpler capital requirements are being implemented via amendments to 12 CFR 3.21, 3.22, 3.300, 217.21, 217.22, 217.300(b) and (d), 324.21, 324.22, and 324.300. This direct final rule is being adopted to permit non-advanced approaches banking organizations to implement the sections of the capital simplifications rule (that were originally expected to be effective on April 01, 2020) from January 01, 2020. Non-advanced approaches banking organizations can elect whether to implement the changes in the quarter beginning January 01, 2020 or to implement them in the quarter beginning April 01, 2020. If a non-advanced approaches banking organization elects to adopt these revisions for the quarter beginning January 01, 2020, it must adopt all of these revisions for that quarter and thereafter.

     

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    Effective Date: January 01, 2020

    Keywords: Americas, US, Banking, Community Banks, CBLR Framework, EGRRCP Act, Leverage Ratio, Capital Adequacy, Reporting, Call Reports, Capital Simplification Rule, Regulatory Capital, Non-Advanced Approaches Organizations, Tier 1 Capital, US Agencies

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