Federal regulators launched a comprehensive capital rule overhaul on March 19, reducing aggregate requirements by 7.8% for smaller banks. The proposal lowers the community bank leverage ratio threshold from 9% to 8% and replaces the flat 50% mortgage risk-weight with an LTV-based scale (35% at 80% LTV). The Fed voted 6-1 to approve the proposals for public comment, with comments due June 18.
Takeaway: The relief sounds good, but the rule was designed around large banks’ trading books, not community bank balance sheets. For example, mortgage servicing assets still carry a 250% risk-weight while the underlying loans get 35%. The proposal does lower the CBLR threshold from 9% to 8%, but it does not fix the underlying mismatch that already excluded many community banks from the framework. An estimated 475 more banks will qualify at 8%. Many community banks opted out, not because they couldn’t meet 9%, but because the CBLR calculation itself is less forgiving than risk-based capital for banks with concentrations in construction or commercial real estate.
Source: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20260319a.htm