Time to finish reg relief for community banks

With this week marking the first anniversary of the signing of the S 2155 community bank regulatory relief law, now is a good time to review its impact on these institutions and where we go from here. While much of the law is being successfully implemented to support localized lending and economic growth, key provisions providing for simpler community bank capital rules and call reports remain unfinished business. Regulators have an opportunity to change that.

Fortunately for community banks and the communities they serve, federal banking regulators have moved ahead swiftly on many provisions of the Economic Growth, Regulatory Relief and Consumer Protection Act. For instance, provisions providing “qualified mortgage” status for portfolio mortgage loans at most community banks, expanding eligibility for the 18-month exam cycle, exempting most community banks from the Volcker Rule, restricting new Home Mortgage Disclosure Act reporting requirements to lenders that make more than 500 mortgages a year, and improving regulatory treatment of reciprocal deposits are already in effect.

But there's a huge opportunity for regulators to further help consumers and small businesses by heeding Congress on provisions to provide highly capitalized community banks with relief from onerous capital rules and excessive reporting requirements.

First, the banking agencies proposed that qualifying banks and bank holding companies with less than $10 billion in assets with a tangible equity-to-assets leverage ratio of greater than 9% would be able to opt into a community bank leverage ratio, or CBLR, framework and not be subject to other risk-based and leverage capital requirements. These institutions would also be considered “well capitalized” under the banking agencies’ Prompt Corrective Action framework. While Congress authorized regulators to establish a CBLR as low as 8%, the agencies are proposing a 9% ratio. This is unnecessarily high. As proposed, the leverage ratio would leave out roughly 600 highly capitalized community banks that would be eligible under the 8% level authorized by Congress.

Lowering the CBLR to 8% would calibrate it more closely to current risk-based capital requirements for well-capitalized banks, including the common equity Tier 1 ratio of 6.5% and the Tier 1 risk-based capital ratio of 8%. It would also put the ratio closer to the current 5% leverage ratio requirement for well-capitalized banks and exceed the 7% statutory net-worth requirement for federally insured credit unions. Community banks shouldn’t be subject to a leverage ratio that exceeds that of credit unions by 200 basis points. That only widens an already unlevel playing field.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, the lead sponsor on S 2155, and committee member Jerry Moran, R-Kan., recently called on the agencies to implement the 8% threshold that Congress authorized. This would ensure relief while setting “a high bar for the amount and quality of equity capital held by community banks,” they wrote. With other lawmakers beginning to join the chorus, regulators should reconsider their proposal.

The relief law's other bit of unfinished business is its provision requiring regulators to create a short-form call report for banks with assets of less than $5 billion to be filed in the first and third quarters of each year. The agency proposal released in November would merely allow eligible community banks to file the FFIEC 051 Call Report during these quarters, effectively eliminating data fields that few community banks use anyway.

This offers little meaningful relief from unnecessary reporting burdens for institutions that are still required to file the full call report at midyear and year-end. The regulators themselves have admitted as much, projecting that their plan would reduce reporting burdens by just 1.18 hours for institutions with assets of less than $1 billion.

Community bankers, who submitted roughly 1,100 comment letters on the call report proposed rule, believe regulators are failing to meet the intent of Congress. Many lawmakers seem to agree. A December letter from a bipartisan group of 19 senators led by Moran said the proposal would have little impact on eligible community banks and the communities they serve. They called on regulators to enact meaningful reporting relief, as Congress intended.

The S 2155 regulatory relief law has advanced numerous pro-Main Street reforms long sought by community banks. But that law, and many other high-priority policy issues, remain a work in progress. Let’s finish the good work we started for the benefit of communities and consumers nationwide — Main Street is counting it.