18 Sep Stress Capital Before Opting into the New Community Bank Leverage Framework
Note to community bank execs: The clock is ticking on how you calculate your capital requirements. The FDIC this week finalized the new 9 percent community bank leverage ratio, and it goes into effect in January for most banks with total assets of less than $10 billion.
But should you opt into the new framework? Invictus estimates that more than 96 percent of community banks would be better off if they used stress testing to quantify their own unique requirements, based on the composition and characteristics of their assets and earnings. The BankGenome intelligence system found that those banks could safely operate with less than a 9 percent leverage ratio, while still withstanding a severe downturn.
That extra capital, which adds up to $44 billion across the industry, could be deployed elsewhere, giving your bank a competitive advantage.
The biggest benefit of opting into the new framework is not having to calculate and report risk-based capital ratios. The final rule adopts Tier 1 capital as the numerator for the capital ratio. It removes criteria for mortgage servicing and deferred tax assets as well as the PCA proxy framework, parts of the original proposal that had generated industry complaints. The final rule also gives banks a two-quarter grace period to be considered well-capitalized if their capital ratios fall below 9 percent but remain above 8 percent.
Banks can opt into the framework when they file their Call Reports—so the first time it will be used would be after the first quarter of 2020. Regulators emphasize that banks can also opt out anytime “without restriction” if they comply with general capital ratios in effect at the time.
The OCC estimates that banks that opt into the new framework will spend “no more than 160 hours” to modify policies and procedures—a cost of approximately $18,240.
Lisa Getter is the publisher of Bank Insights.