Community Bank Leverage Ratio (CBLR) questions and answers

Effective Jan. 1, 2020, “qualifying community banking organizations” may opt into the community bank leverage framework. This update addresses some common questions related to the new Community Bank Leverage Ratio (CBLR):

1. What is the community bank leverage ratio? 

The CBLR is an alternative framework that can be used to calculate a bank’s capital ratio. The CBLR significantly simplifies the calculation of the capital ratio by relying on total average assets and therefore eliminating the need to calculate risk-based assets by completing schedule RC-R, Part II – Risk-Weighted Assets. 

2. How does the CBLR change how we calculate capital ratios?

Currently, capital is reported and evaluated using the following four ratios:

The CBLR calculation will look very similar to the leverage ratio because it takes the tier 1 capital ratio divided by average total assets LESS deductions from tier 1 capital. This calculation eliminates the need to calculate risk-based assets.

• Tier 1 capital for CBLR purposes is defined as Total equity (RC, item 27.a), LESS Accumulated other comprehensive income (RC, item 26.b), LESS Goodwill (RC-M, item 2.b), LESS All other intangible assets (RC-M, item 2.c), LESS Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances (currently RC-R, Part I, item 8).

3. What is a “qualifying community banking organization”?

The following criteria must be met to qualify for opting in to the CBLR:

• Leverage ratio must be greater than 9%.
• Consolidated assets must be less than $10 billion.
• Total off-balance sheet exposures must be 25% or less of total consolidated assets, based on the most recent calendar quarter. 
  • Off-balance sheet exposures that would likely impact community banks include:
    • Unused portions of commitments (excluding unconditionally cancellable commitments).
    • Securities lent or borrowed (Sum of RC-L, 6.a and 6.b).
    • Warranties on secondary market loans sold.
    • Credit enhancements (common with Federal Home Loan Bank MPF programs).
    • Financial standby letters of credit.
    • Forward commitments that are not derivative contracts. 
    • Other less common items noted in FDIC Part 217.
• Total trading assets and trading liabilities must be 5% or less of consolidated assets, based on the most recent calendar quarter. 

4. What if the CBLR falls below 9% or the bank does not meet the criteria listed in #3?

The bank is given a two-quarter grace period, starting the quarter the bank ceased to qualify and ending the last day of the second consecutive calendar quarter following the beginning of the grace period. 

• If the CBLR falls below 8% at any time, the bank is not eligible for the grace period and must calculate the risk-based capital ratios.  
• There is no grace period applied to mergers and acquisitions.

5. What do I have to do to opt in to the CBLR?

A bank can opt in or opt out of using the CBLR framework each time it completes the Call Report by completing a designated question on the Call Report to indicate the bank’s election to opt in to the CBLR framework. 

6. Should our bank opt in to the CBLR?

It is important to know the bank can opt in or out of the CBLR each time it completes the Call Report. Management should consider the advantages and disadvantages of opting in to the CBLR framework.  

Advantages of opting in to the CBLR framework:

• The most significant advantage of electing the CBLR framework is the time savings that would be gained by eliminating the need to complete RC-R, Part II – Risk-Weighted Assets. Since RC-R, Part II is one of the more complex schedules to complete, this would also eliminate any errors or audit exception associated with calculating risk-based assets. For a bank that manually calculates risk-based assets, the time saved could be considerable.

Disadvantages of opting in to the CBLR framework:

• The 9% CBLR ratio likely requires the bank to hold more capital than what would be required if the traditional capital calculation was used. Currently, a 5% leverage ratio is considered “well capitalized.”  Management should consider this additional capital requirement when completing capital planning. 
• If the bank no longer prepares RC-R, Part II on a regular basis, the knowledge base may be lost, or risk-based capital rule changes may be missed. Call Report preparers may struggle to accurately complete RC-R, Part II, if necessary, in the future. 

7. How does the CBLR impact the capital conservation buffer?

The CBLR will eliminate the capital conservation buffer. As long as the CBLR remains above the required 9%, there are no restrictions on distributions or discretionary bonus payments.

8. What else should be considered when deciding to opt in or opt out of the CBLR?

Since the CBLR ratio is made up of average consolidated assets and tier 1 capital, management should review items reported at RC-K, item 9 – Average consolidated assets and RC-R, Part I, items 1 through 8, to ensure these items are reported consistent with the Call Report instructions. 

Management should consider its strategic and capital plans in its decision. Opting in to the CBLR framework may require more capital reserves than would be necessary using the risk-based capital framework.  

How Wipfli can help 

If you would like to discuss the CBLR rule, Call Report review services, or strategic/capital planning, please contact your Wipfli relationship executive.