Regulators Provide Regulatory Capital and Liquidity Relief to Banks
As banks across the country rush to process PPP loan applications and help borrowers in financial distress, regulators have issued two important interim final rules in the last week to provide regulatory capital relief and additional liquidity to institutions in the wake of COVID-19. As bank balance sheets swell from increased loan demand, we hope the combination of these new provisions relieves at least some of the stress currently facing institutions.
Temporary Reduction to the Community Bank Leverage Ratio
On April 6, 2020, the regulatory agencies issued Financial Institution Letter (FIL) 35-2020, an interim final rule related to the Community Bank Leverage Ratio (“CBLR”). This change will only impact institutions who voluntarily adopt the ratio in place of the historic risk based capital requirements.
The rule has the following key components to consider:
- Beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework. This is a decrease from a requirement of 9 percent in the original rule.
- The community bank leverage ratio will be 8 percent beginning in the second quarter and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter.
- Community banking organizations will have until January 1, 2022, before the community bank leverage ratio requirement is re-established at greater than 9 percent.
- The interim final rules also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent (i.e. below 7 percent) below the applicable community bank leverage ratio.
If you are planning to adopt the CBLR in the first quarter of 2020, it is important to review the guidance above. Note this rule starts in the second quarter and the 9 percent CBLR remains in effect for the quarter ended March 31, 2020.
Regulatory Capital Relief for PPP Lenders
On April 9, 2020, the regulatory agencies issued an additional interim final rule clarifying capital requirements surrounding the Payroll Protection Program (PPP). This new rule encourages PPP lending by attempting to neutralize the impact of PPP loans on a bank’s capital ratios as well as providing additional liquidity to institutions.
The rule has the following key components:
- In order to provide liquidity to small business lenders and the broader credit markets, and to help stabilize the financial system, the Federal Reserve authorized the Federal Reserve Banks to establish the PPPL Facility.
- Through the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible lenders to fund loans under the PPP.
- To support the use of the PPPL Facility, the agencies are allowing banking organizations to exclude loans pledged as collateral to the PPPL Facility from the bank’s average total consolidated assets. This helps to neutralize the impact of PPP lending on the bank’s leverage ratio for institutions that choose to use the PPPL Facility.
- All PPP loans will be risk weighted at 0%, which also neutralizes the impact on the bank’s risk based capital ratios.
Next Steps
Capital and liquidity planning are critical components to guiding any institution through the current environment. CLA is here to help. Please contact us.
David is a principal with the financial institutions group, dedicated to certified audits, directors’ examinations, internal audits, and general control reviews. David began his career with CliftonLarsonAllen in 2005, and has twelve years of experience working with financial institutions.
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