Updated CBLR framework: Rethinking capital framework decisions
- Proposed CBLR framework changes aim to increase flexibility without weakening capital expectations.
- Lower thresholds and longer grace periods may expand CBLR viability for more banks.
- Choosing the right capital framework depends on risk profile, growth plans and M&A activity.
When the Community Bank Leverage Ratio (CBLR) framework was introduced in 2020, it was intended to simplify regulatory capital requirements for qualifying community banks. However, in practice, adoption has remained limited.
While regulators estimate that a majority of banks under $10 billion in assets are eligible, only about 40% have elected to use the framework — a participation rate that has remained relatively flat over time. This gap between eligibility and adoption suggests that, for many institutions, the original structure of CBLR did not fully align with how they manage capital in practice.
Regulators have proposed new CBLR requirements, aimed at improving flexibility without diluting capital standards. Here’s what the CBLR framework updates may mean for your bank and capital strategy:
What are the proposed revisions to the CBLR framework?
The proposed revisions to CBLR include:
- The required CBLR would be reduced from greater than 9% to greater than 8%.
- The grace period would also be expanded from two quarters to up to eight quarters within a rolling 20‑quarter period, provided the leverage ratio does not fall below 7%.
Together, these changes are intended to provide additional flexibility without fundamentally altering the capital strength expected of banks that elect the CBLR framework.
How does the CBLR proposal impact banks?
For banks, the updated CBLR requirements mean:
- Increased eligibility: Lowering the leverage threshold allows banks with moderate balance‑sheet growth or earnings volatility to remain eligible, reducing the likelihood that routine fluctuations would force an exit from the framework.
- A longer grace period: The longer grace period gives management more time to respond to temporary capital pressures or stress events without immediately triggering reporting and compliance changes.
- Greater flexibility: Importantly, regulators have emphasized that even with these revisions, banks using CBLR must continue to maintain capital levels that are comparable to — or higher than — those required under the risk‑based capital framework. The leverage ratio for CBLR banks would also remain double the minimum applicable to banks that do not opt into the framework. As a result, the proposal represents an adjustment to flexibility and optionality, not a relaxation of overall capital expectations.
How do the updates impact CBLR election?
The proposed revisions are designed to address challenges with the structure of CBLR and make the framework more workable for a broader range of community banks.
Several factors likely contributed to the low adoption rate of CBLR. The original 9% leverage threshold exceeded many banks’ internal capital targets, making it difficult to maintain sufficient buffers without constraining growth. Some institutions also expressed concern about managing capital adequacy using a single leverage metric that does not reflect asset mix or risk concentrations.
In addition, the potential operational disruption of reverting to risk‑based capital reporting if a bank fell out of compliance created uncertainty, particularly given the limited two‑quarter grace period.
What does the CBLR update mean for your risk management?
From a safety and soundness perspective, regulators have emphasized that the proposed changes are intended to preserve strong capital standards while better aligning the framework with how community banks operate in practice.
The revised CBLR thresholds were evaluated alongside the risk profiles, business models and historical capital levels of qualifying institutions. The conclusion was that the framework would continue to require capital levels comparable to — or higher than — those required under the risk‑based capital framework. Additionally, built‑in safeguards, including a defined minimum leverage ratio during the grace period and limits on how long a bank may operate below the CBLR threshold, are intended to prevent sustained capital erosion.
As with many regulatory changes, the effectiveness of the framework ultimately depends on sound governance, disciplined capital planning, and ongoing monitoring — reinforcing that CBLR is a simplification option, not a substitute for strong governance and risk management.
What does the update mean for the risk-based capital framework?
The proposed changes to CBLR do not diminish the relevance of the risk‑based capital framework. For many community banks, remaining under risk‑based capital may continue to be the better fit based on their risk profile and strategic objectives.
Risk‑based capital ratios provide greater sensitivity to asset composition, concentrations and off‑balance‑sheet exposures, which can be particularly important for institutions with higher levels of commercial lending or more complex balance sheets. Some banks may also prefer the ability to manage capital across multiple ratios rather than operating against a single leverage threshold, especially during periods of growth or strategic change.
How could the update impact potential M&A activity?
The proposed changes may also influence how banks consider capital frameworks in the context of merger and acquisition activity.
Transactions can introduce temporary balance‑sheet volatility, changes in asset mix or short‑term capital pressure as integration activities unfold. For banks operating near leverage or capital thresholds, the reduced CBLR requirements and extended grace period may provide additional flexibility to manage through post‑merger transitions without immediately triggering a framework change.
Conversely, institutions with active acquisition strategies or more complex post‑transaction balance sheets may continue to prefer the risk‑based capital framework, which can offer greater sensitivity to changes in risk profile and capital composition. As a result, anticipated M&A activity should be an important consideration when evaluating which capital framework best supports an institution’s long‑term strategy.
CBLR vs. risk-based capital framework
Determining which capital framework is most appropriate for your bank requires a thoughtful, institution‑specific evaluation that goes beyond eligibility alone.
To make an effective decision, leadership should:
- Assess the stability of earnings and the degree of balance‑sheet volatility to understand how comfortably they can operate against a single leverage threshold versus multiple risk‑based ratios.
- Consider asset mix and concentration levels, including the use of off‑balance‑sheet exposures, to evaluate whether a leverage‑based or risk‑sensitive framework more accurately reflects the institution’s risk profile.
- Review growth plans, including organic expansion, strategic initiatives or potential merger activity, as these may also influence the need for flexibility in capital management.
- Understand operational readiness and governance. These play an important role, including the bank’s ability to monitor capital trends, manage potential transitions between frameworks and support effective board oversight.
- Evaluate management’s comfort with the ongoing capital management requirements under each framework, together with the board’s risk appetite and capital philosophy. These factors should ultimately guide the decision, ensuring the selected approach aligns with the institution’s long‑term strategy while maintaining strong capital levels and regulatory confidence.
As regulators move closer to finalizing the proposed changes, banks have an opportunity to reassess whether their current capital framework continues to support their strategy and operating model.
A deliberate evaluation, grounded in capital planning, stress testing and governance, can help management and boards determine whether CBLR or risk‑based capital is better aligned with the institution’s long‑term objectives, while continuing to maintain strong capital levels and regulatory confidence.
How Wipfli can help
Whether navigating regulatory change, growth or M&A activity, capital strategy must support where your bank is headed next. Wipfli’s bank advisory team works alongside leadership to bring clarity to complex decisions across risk and strategy.
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