By Jenna Burke, ICBA
Unprecedented deposit growth from an influx of COVID-19 economic stimulus has created a much-needed financial cushion for American consumers and small businesses. It’s also created regulatory challenges for community banks, as temporary relief designed to protect community banks from COVID-19 deposit growth expired on Dec. 31, 2021. ICBA is working to help restore these essential protections while the pandemic and its effects continue to weigh on community banks.
A temporary fix for an ongoing problem
When Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in March 2020, it recognized stimulus monies would swell the balance sheets of community banks. This would have a negative impact on the community bank leverage ratio (CBLR), a framework designed to simplify regulatory capital requirements and provide regulatory relief to well-capitalized banks with less than $10 billion in assets. Before the pandemic, this benchmark was set at 9%.
The CARES Act, along with prudential banking agencies, mitigated this challenge with ICBA-advocated provisions that temporarily reduced the CBLR to 8% for 2020 and 8.5% for 2021 (or 60 days after the end of the COVID-19 crisis, whichever was sooner). This gradual transition back to the original ratio assumed that the pandemic would be over by the end of 2021—something that simply hasn’t happened.
Extended temporary relief from the 9% CBLR and the FDICIA audit and reporting requirements is urgently needed to stave off a contraction in lending in support of local communities.
As COVID-19 continues to wreak havoc and community bank deposits remain at record highs, COVID-19 economic stimulus is placing significant pressure on bank balance sheets. In addition to the 9% CBLR benchmark, community banks will soon be required to use recent and deposit-heavy call report data to calculate Federal Deposit Insurance Corporation Improvement Act (FDICIA) asset thresholds. This will force many of them to comply with onerous regulatory audit and reporting requirements even though they did not seek to grow their deposit bases.
Staving off economic contraction
ICBA recognizes the strain this sudden and persistent increase in deposits will place on community banks, just as Congress did when it wrote the CARES Act. Extended temporary relief from the 9% CBLR and the FDICIA audit and reporting requirements is urgently needed to stave off a contraction in lending in support of local communities.
ICBA has been working with its partners and communicating with legislators and regulators to make it known that without the relief, community banks will be forced to curtail their small business lending in 2022 to comply with the higher 9% CBLR. Cash and cash-equivalent balances at community banks have more than doubled from about $352 billion to about $749 billion between year-end 2019 and Sept. 30, 2021. Community banks have been flooded with more deposits than they can put to productive use in funding loans, and this has driven down their leverage ratios.
In December 2021, ICBA co-signed a letter from 44 state banking associations asking for a minimum one-year extension of the agencies’ temporary asset threshold relief measures to allow deposit runoff to take effect and for deposits to return to normalized, pre-pandemic levels. The letter shares the association’s united opposition to an “unnecessary, unfair and unjustifiably costly regulatory treatment.”
ICBA also issued a national press release shortly before Christmas, with ICBA president and CEO Rebeca Romero Rainey warning that banking regulators’ decision to resume a 9% CBLR at the beginning of 2022 “penalizes community banks for supporting local communities throughout the pandemic.” She added, “Because deposit levels remain elevated due to emergency stimulus payments, reintroducing the 9% CBLR will harm community bank small-business lending in the middle of a global health crisis.”
In its release, ICBA asked regulators to extend the 8.5% CBLR requirement, raise audit and reporting requirement asset thresholds and provide extra flexibility given the long-lasting impact of COVID-19 relief efforts on community bank capital levels.
“Extending this much-needed relief would allow community banks to continue operating without concerns about decreases in their required regulatory capital ratios to the benefit of the local customers and communities they have served so well during this ongoing pandemic,” the release stated.
Members of Congress and regulators have been open to the message. Responding to a letter from ICBA, FDIC chairman Jelena McWilliams, who leaves her position on Feb. 4, wrote that her agency was exploring whether to extend audit and reporting relief while it engages other regulators on additional CBLR flexibility.
Meanwhile, ICBA continues to support the Community Bank Relief Act (H.R. 6145) introduced by Rep. Tracey Mann (R-Kan.), which would allow regulators to implement a CBLR of 8% to 8.5% through 2024.
How you can speak out
ICBA will continue to push for relief from the 9% CBLR and the FDICIA asset thresholds. We encourage community bankers to join the effort to urge the banking agencies to extend temporary pandemic relief measures through 2022 to accommodate persistently elevated deposit levels caused by stimulus payments.
Jenna Burke (email@example.com) is ICBA senior regulatory counsel