Community Bank Leverage Ratio (CBLR)

What is the issue?

The Community Bank Leverage Ratio (CBLR) measures bank capital relative to its assets and is closely monitored by regulators as an indicator of a bank’s health. 

In support of consumers and small businesses throughout the pandemic, community banks have seen their balance sheets grow significantly and unexpectedly, both from Paycheck Protection Program (PPP) lending and from increased customer deposits.  These developments have put banks’ leverage ratios under strain.  If a leverage ratio falls below the required amount, banks’ ability to lend and accept deposits could be limited.

In recognition of the unique situation that the pandemic and related relief programs created, and to allow banks greater flexibility to support and provide relief for customers and communities, Congress passed the 2020 CARES Act and reduced the CBLR to 8%. 

However, on January 1, 2022, the community bank leverage ratio reverted to a minimum of 9% as pandemic-related relief expired.  

How does this affect you?

The impact of Paycheck Protection Program loans and the influx of deposits on banks’ balance sheets and capital ratios is substantial.  

Community banks went the extra mile to ensure their customers had access to Paycheck Protection Program funds. Notably, these banks made more than 4.2 million loans worth $318.5 billion under the Small Business Administration’s Paycheck Protection Program to help keep small businesses open and to preserve jobs. 

Banks are expected to hold a capital buffer against PPP loans- even when there is essentially no risk of loss. Although PPP loans are considered super safe assets, they are still included in a bank’s leverage ratio and risk-based capital calculations. Until PPP loans are forgiven, some banks leverage ratios will fall below the required 9% threshold and affect a bank’s ability to accept new deposits and meet the current needs of customers.    

A return to a 9% CBLR penalizes community banks for supporting local communities throughout the COVID-19 pandemic. 

What can Congress do?

Congress can provide community banks the flexibility they need to meet the needs of customers by passing the Community Bank Relief Act (S. 3409/ H.R. 6145). The bill would direct regulators to lower the community bank leverage ratio between 8 and 8.5% until the end of 2024. A lower leverage ratio will allow community banks to continue serving their communities, small businesses and customers struggling to recover from the pandemic.