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Stimulus Bill Grants Small Banks a Break on Capital Requirements

By Bram Berkowitz - Mar 26, 2020 at 2:11PM

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For the duration of the coronavirus crisis, it reduces the leverage ratio requirement for banks with less than $10 billion in assets, allowing them to lend out more money.

The $2 trillion stimulus bill expected to soon be signed into law has some nice perks for community banks that hold under $10 billion in assets.

Among them is a provision that would allow these smaller banks to reduce the amount of capital they hold in reserve, decreasing their leverage ratio requirement from 9% to 8%.

The current regulations regarding banks' leverage ratios were put into place following the financial crisis as a way to better ensure that they would be prepared to cover heavy loan losses should the need arise. The ratio specifically measures the core capital of a bank relative to its total assets.

Bank

Image Source: Getty

So, if a bank lends out $100, and has $10 of capital held in reserve to cover possible losses in that loan pool, its leverage ratio would be 10% (10 divided by 100).

The higher the ratio, the safer the bank. But the lower the required ratio, the more of their money those banks can lend -- and earn interest on -- opposed to just letting it sit there. In this case, the nation's smallest banks say the reduction is necessary so they can get more of their money out into the economy where it can aid those impacted by the coronavirus pandemic and the massive economic shocks it is generating.

Before the stimulus bill, banks with less than $10 billion in assets could opt into the community bank leverage ratio framework -- the 9% rule -- and avoid having to calculate and report various risk-based capital ratios that are extremely complex to calculate.

Although the change in the leverage ratio requirement is not permanent, The New York Times has noted that it's something that small banks pushed hard to get included in a 2018 bill that rolled back some provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. But their lobbying efforts at the time were unsuccessful.

 

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