Less than 35% of banks under $10 billion adopt a simplified capital ratio
A ratio designed to reduce the regulatory burden on community banks launched this year, but only 34% of banks with less than $10 billion in assets benefit from it.
The Community Banking Leverage Ratio provides regulatory relief for banks with total assets of less than $10 billion, in addition to certain other requirements, by reducing reporting from four Basel III ratios to one. The CBLR that banks must maintain is higher than the minimum leverage ratio required by Basel III.
Banks that chose not to adopt the new option likely found the cost of switching to be higher than the benefit, were too close to crossing the $10 billion asset limit, or posted CBLR below the expectations due to the massive amount of loans for the paycheck protection program. Conversely, banks that have adopted CBLR have found significant efficiencies in filing call reports.
Banks must report a CBLR greater than 9% to take advantage of the Basel III exit ramp. According to an analysis by S&P Global Market Intelligence, nearly 90% of banks with less than $10 billion in assets reported a ratio above 9% as of March 31, excluding companies with foreign banking organization charters. Of the 4,421 banks that met the leverage ratio requirement, only 39% opted for CBLR. Some of the banks that did not opt for the ratio may not have been eligible for the ratio based on other criteria, such as off-balance sheet exposures below 25% of total assets.
The Independent Community Bankers of America, a trade group for small banks, expected this level of participation, said Christopher Cole, executive vice president and senior regulatory adviser at ICBA.
“The benefits of using CBLR in many cases do not outweigh the cost of switching,” he said in an interview.
Many banks worried that regulators would expect a buffer above the minimum, pushing the leverage ratio closer to 10%, Cole said. The Paycheck Protection Program, which increased banks’ loan portfolios, may have discouraged some banks from adopting the new ratio. Having additional PPP loans can bring down CBLR, Cole said.
Despite these hurdles, some banks have opted to adopt the ratio anyway, including Dallas-based Veritex Community Bank.
“It’s a little more efficient report, no need to go through the call report, less time to type it in and review all the detailed components. It speeds that up,” Veritex CFO Terry Earley said in an interview.
Despite lowering its leverage ratio in the first quarter of 2020 due, in part, to a subordinated debt issuance, Veritex still has strong capital ratios, Earley said, and is not at risk of falling below the 9 %.
The only downside to adopting the ratio was questions from analysts and investors looking for the details provided by the old ratios, Earley said. But he said it was an easy fix since the bank still has to report all four ratios in its filings with the Securities and Exchange Commission.
Veritex had total assets of $8.53 billion as of March 31, but Earley said it was unlikely to cross the $10 billion threshold for a few years. “If I had been close, I probably wouldn’t have done it,” he said. “But we could see far enough to say, ‘This will make life a little bit easier for the next few years, let’s do it. “”
Veritex made the decision to adopt CBLR before the PPP began, Earley said. The bank did not use the PPP liquidity facility to fund the loans.
“For the leverage ratio, you have to use the PPPLF to get the leverage ratio relief from the PPP loans. We just didn’t need the funding, because of the massive deposit inflows that all the banks are seeing,” Earley said. .
The Coronavirus Relief Act, in addition to creating the PPP, also included relief for community banks, temporarily lowering the CBLR adoption threshold to 8% starting in the second quarter of 2020. ICBA hopes that this The change will be permanent, Cole said, as it will allow more banks to participate and give banks between 9% and 10% more confidence in adopting the ratio. More banks will likely opt for CBLR in the second quarter, when the threshold drops to 8% for the rest of 2020 and increases to 8.5% in 2021, Cole said.