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Dodd Frank rollback law provides regulatory relief for community banks – Part 1: Capital requirements, financial reporting, Volcker rule

Greg Omer May 30, 2018

Last week, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) into law. The Act was supported by a bi-partisan vote in both houses of Congress and has been touted as a “rollback” of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd Frank”).

The new law will make a variety of changes aimed at easing the regulatory burdens on community banks, including regulatory requirements derived from Dodd Frank.

This post covers provisions in the Act that could impact community banks with regard to capital requirements, financial reporting and the Volcker Rule. Check back for follow-up posts with analysis of other aspects of the Act that could impact community banks.

Community bank leverage ratio – bank organizations under $10B

Dodd Frank and related regulations imposed a variety of new and stringent capital standards on banks and bank holding companies. Some of these standards were derived from the Basel III international capital accords, and many community bank advocates have maintained that these more stringent and complicated standards should have been directed only at the largest U.S. banking organizations and not at small community banks.

In response to this Dodd Frank capital issue, the Act creates a “community bank leverage ratio,” which will be a new, simplified capital standard available for any “qualifying community bank” with less than $10 billion in total assets that meets certain conditions. A “qualifying community bank” can be a depository institution or a depository institution holding company.

The ratio will be calculated by dividing tangible equity capital by average total consolidated assets of the “community bank.” The federal bank regulators will establish a required community bank leverage ratio capital adequacy percentage threshold, which will be between 8 and 10 percent.

If a community bank exceeds the required community bank leverage ratio capital adequacy threshold, it will be considered to have met:

  • The current risk-based capital and leverage capital requirements that would otherwise be applicable, and
  • Any applicable “prompt corrective action” capital requirements to be “well-capitalized.”

This community bank leverage ratio could bring significant relief for banks by allowing them to avoid the time-consuming and costly calculations involved in risk-based capital calculations for capital adequacy purposes.

Small Bank Holding Company Policy Statement – capital requirement exemption for holding companies under $3B

Dodd Frank included an exemption from certain capital adequacy requirements for bank holding companies that are subject to the Federal Reserve’s “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” (the “Policy Statement”).

The new Act requires the Federal Reserve to revise its regulations on the Policy Statement so that the Policy Statement will be applicable to any bank or savings and loan holding company with less than $3 billion in consolidated assets, provided that the holding company meets certain other requirements. Immediately prior to the Act’s passage, the asset threshold for Policy Statement applicability was $1 billion. Banks subject to the Policy Statement are also eligible to incur more debt than otherwise permitted under Federal Reserve capital rules.

High volatility commercial real estate (HVCRE) capital requirement exemption

Regulations issued under Dodd Frank imposed special higher capital requirements on loans categorized as “high volatility commercial real estate” (“HVCRE”) loans. These higher capital requirements have been implemented by assigning heightened risk weights to HVCRE loans in the calculation of risk-based capital.

The Act overrides the Dodd Frank regulations on HVCRE loans so that the higher HVCRE capital requirements will only apply to HVCRE loans that are for the acquisition, development or construction of real estate ("HVCRE ADC Loans"), which, subject to certain exceptions, include loans that:

  • are secured by land or improved real property;
  • have the purpose of providing financing to acquire, develop, or improve the real property such that the property becomes income-producing; and
  • are dependent upon future income or sales proceeds from, or refinancing of, the real property for repayment.

The Act clarifies and expands exemptions from this definition, including an exemption for loans to developers who have contributed capital of at least 15 percent of the development’s appraised “as completed” value.

The Act also includes provisions for de-classifying loans as HVCRE ADC Loans.

Volcker Rule exemption – banking organizations under $10B

Dodd Frank included a provision known as the “Volcker Rule” with restrictions on banking organizations conducting “proprietary trading” in securities and entering into certain relationships with hedge funds and private equity funds.

The Act establishes an exemption from the Volcker Rule for banking organizations with:

  • total assets valued at less than $10 billion, and
  • trading assets and liabilities comprising not more than 5% of total assets.

Although many community banks do not normally conduct the type of activities that are limited by the Volcker Rule, the new exemption will provide relief for those that do.

Short form call reports – banks under $5B

The Act also requires the federal bank regulatory agencies to provide “reduced reporting requirements” for certain call reports of depository institutions with assets under $5 billion that meet any additional requirements set by the regulators.

More analysis coming soon

For information about the other areas affected by the Dodd Frank rollback, read the other posts in this series. Part two covers the changes impacting residential mortgage lending, and part three covers miscellaneous provisions, like exam cycles, customer identification requirements, "brokered deposit" exemptions and new federal savings association powers.

Greg Omer is a partner in Thompson Coburn’s Banking practice.