Bipartisan regulatory reform bill includes significant changes for community banks

by Ballard Spahr LLP

[author: Scott Coleman]

On November 13, members of the Senate Banking Committee announced that they had reached bipartisan agreement on “legislative proposals to improve our nation’s financial regulatory framework and promote economic growth.”  Following the announcement, a draft of a bill was released by Senator Mike Crapo, who chairs the Banking Committee.  A markup of the bill is scheduled for December 5, 2017. Observers believe that due to its bipartisan support, there is a strong likelihood that the bill will be enacted as part of a regulatory relief package.

We previously discussed the provisions of the bill relevant to providers of consumer financial services.  The following regulatory reform provisions are relevant to community banks generally, including those focused on the provision of consumer financial services:

Capital Simplifications for Qualifying Community Banks (Section 201).  The bill would require the federal banking agencies to establish a “Community Bank Leverage Ratio” of not less than 8% nor more than 10% for “Qualifying Community Banks.”  The Community Bank Leverage Ratio would be equal to the tangible equity capital to the average total consolidated assets.  A Qualifying Community Bank would be any insured depository institution or depository institution holding company with total consolidated assets of less than $10 billion that was not determined ineligible by its primary federal regulator due to its risk profile. (Factors considered in evaluating a bank’s risk profile would include (i) off-balance sheet exposures, (ii) trading assets and liabilities; (iii) derivative exposures; and (iv) other factors).  Any Qualifying Community Bank that met the new Community Bank Leverage Ratio would also be considered to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such insured depository institution and insured depository institution holding company is subject.  Any Qualifying Community Bank that was an insured depository institution would also be deemed well capitalized under Section 38 of the Federal Deposit Insurance Act (FDIA) and related regulations.  This would insulate a large number of community banks from the complexities of the Basel III capital framework.

Limited Exception for Reciprocal Deposits (Section 202).  The bill would provide that reciprocal deposits from an agent institution will not be considered to be funds obtained, directly or indirectly, by or through a deposit broker to the extent such reciprocal deposits do not exceed the lesser of (A) $5 billion and (B) 20% of the agent institution’s  total liabilities.  This change would benefit less than well capitalized financial institutions that would otherwise have to request a difficult to obtain waiver or would be ineligible to receive an  FDIC  waiver from the restrictions in Section 29 of the FDIA on the acceptance of brokered deposits.

Community Bank Relief (Section 203).  The bill would exempt banks with less than $10 Billion in assets from the Volcker Rule in Section 13 of the Bank Holding Company Act of 1956 (Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds) so long as the total trading assets and trading liabilities of the bank and any company that controls the bank were less than five percent of total consolidated assets.

Short Form Call Reports (Section 205).  The bill would require federal regulators to prescribe regulations to simplify call reports for the insured depository institutions they supervise that (i) have less than $5 billion in total consolidated assets; and (ii) satisfy other criteria set out by such federal regulator.

Option for Federal Savings Associations to Operate as Covered Savings Associations (Section 206).  For federal savings associations with total consolidated assets equal to or less than $15 billion, the bill would provide the same rights and privileges as national banks upon notice submitted to the OCC.  Federal savings associations would continue to maintain such rights and privileges after such election, even if the total consolidated assets of the federal savings association subsequently exceed $15 billion.

Small Bank Holding Company Policy Statement (Section 207).  The bill would require the Board of Governors of the Federal Reserve System to revise the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” to increase the consolidated asset threshold thereunder from $1 billion to $3 billion, leaving the other requirements of such bank holding companies and savings and loan companies the same.  This change would allow bank holding companies with less than $3 billion in assets to avoid consolidated capital requirements and allow them to comply instead with less restrictive debt-to-equity limitations.

Examination Cycle (Section 211).  The bill would raise the threshold in Section 10(d)(4)(A) of the FDIA for small institutions eligible for 18-month examinations from $1 billion to $3 billion of total consolidated assets.

Enhanced Supervision and Prudential Standards for Certain Bank Holding Companies (Section 401).  The bill would raise the assets threshold for systemically important banks subject to enhanced prudential standards from $50 billion to $250 billion.  This amendment would take effect upon enactment for institutions with less than $100 billion in total consolidated assets, and would take effect 18 months after enactment for all other institutions.  This would reduce the number of institutions subject to enhanced standards.

Treatment of Certain Municipal Obligations (Section 403).  The bill would require the federal banking agencies to treat liquid, readily-marketable and investment grade municipal obligations as high-quality level 2B liquid assets for purposes of the final rule entitled “Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities as High-Quality Liquid Assets.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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