Imagine a scenario where your local community bank could lend more money to small businesses and families in your neighborhood. That vision might be closer to reality than you think, because Federal banking regulators are reportedly on the verge of proposing a significant change that could free up capital for community banks to do just that.
According to a Bloomberg report, a plan is in the works to lower the community bank leverage ratio (CBLR) from its current level of 9% to 8%. This seemingly small change could have a ripple effect, potentially injecting much-needed funds into local economies. The regulators involved in this potential change are the Federal Reserve (often called the Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). They are expected to propose this change and then solicit public feedback before making any final decisions. PYMNTS reached out to these agencies for comment, but only the FDIC declined to comment. The Fed and OCC did not respond to the request as of the time of the report.
So, what exactly is the community bank leverage ratio, and why does lowering it matter? Simply put, it’s a measure of a bank's capital compared to its assets. A lower ratio means that banks can hold less capital in reserve for every dollar they lend out. This frees up more funds for lending, which is the regulators' stated goal: to encourage these smaller, community-focused banks to extend more credit to individuals and businesses.
Federal Reserve Vice Chair for Supervision Michelle Bowman has been a vocal advocate for revisiting the CBLR. In an August speech, she stated that lowering the requirement could allow more community banks to adopt the framework, and also increase balance sheet capacity for all CBLR firms. This, in turn, could facilitate additional support for local economies through increased lending. Treasury Secretary Scott Bessent echoed this sentiment in an October speech, noting Bowman's long-standing advocacy for revisiting the community bank leverage ratio.
And this is the part most people miss... the OCC, in announcing actions to reduce regulatory burdens for community banks, specifically mentioned adjustments to the CBLR framework as being on its agenda. This signals a clear intention to prioritize reforms targeted at community banks, even ahead of broader reforms for the entire banking industry. The OCC emphasized that it will continue to prioritize regulatory reforms for community banks before broader changes for the industry.
But here's where it gets controversial; some might argue that lowering the leverage ratio could make community banks more vulnerable during economic downturns. A lower capital cushion could mean that these banks are less able to absorb losses if a large number of borrowers default on their loans. Others might argue that the current 9% ratio is already too conservative and that lowering it to 8% is a reasonable step to stimulate lending without significantly increasing risk. It's a delicate balancing act between promoting economic growth and ensuring the stability of the financial system.
Ultimately, the proposed change to the community bank leverage ratio highlights a broader effort to tailor regulations to the specific needs and characteristics of community banks. The goal is to strike a balance between ensuring their safety and soundness and enabling them to play a vital role in supporting local economies. What do you think? Is lowering the community bank leverage ratio a good idea, or does it create unnecessary risks? What other measures could be taken to support community banks and the communities they serve? Feel free to share your thoughts and opinions in the comments below.
