Leverage Ratio Reform For Community Banks Proposed By Federal Regulators

On November 25, 2025, the US federal banking regulators proposed changes to the community bank leverage ratio ("CBLR") framework (the "Proposal").¹ The changes are intended to encourage additional community banks to opt into the CBLR framework and may spur additional lending by such institutions.

Comments on the Proposal must be submitted by January 30, 2026. Below, we provide background on the CBLR framework and discuss the changes in the Proposal.

Background

Since the 1980s, US banks have been required to comply with minimum capital requirements. Over the years, those requirements have increased in length to the point where they consume over 250 pages of the Code of Federal Regulation. While the requirements have a degree of tailoring for an institution's size and complexity, effectively all 4,000+ US banks are subject to a significant portion of their complex terms. This is despite the fact that the international standard setter for bank capital, the Basel Committee on Banking Supervision, only requires member jurisdiction to apply such extensive capital requirements to "internationally active banks."

To address this mismatch, in 2018, Congress directed the federal banking regulators to establish a CBLR framework for qualifying community banking organizations ("QCBO").² To be a QCBO and opt into the CBLR framework, a bank must have less than $10 billion in total consolidated assets and meet any other risk profile criteria established by the regulators.

Under the statute, the regulators were required to set a minimum required ratio of a QCBO's tangible equity capital to its average total consolidated assets of between 8% and 10%. In 2019, the regulators established a CBLR requirement of 9%.³ Additionally, they required banks to have (i) off-balance sheet exposures of 25% or less of total consolidated assets and (ii) total trading assets plus trading liabilities of 5% or less of total consolidated assets to be QCBOs.

If a QCBO satisfies the minimum 9% CBLR, then it is considered to be in compliance with the generally applicable leverage capital requirements, the generally applicable risk-based capital requirements, and the prompt corrective action framework's "well capitalized" definition. Such an institution is not required to compute its capital levels under the much more complex requirements discussed above.

CBLR Proposal

The regulators have stated that only about half of the banks that qualify to use the CBLR framework have opted into it. The Proposal notes possible reasons for this low adoption rate, including that banks do not believe the CBLR framework provides effective relief from the burden of complying with the generally applicable capital requirements and that it is not well calibrated as a capital requirement. The Proposal is intended to address these concerns by making two changes to the CBLR framework.

First, the Proposal would reduce the CBLR requirement from 9% to 8%. This would allow more community banks to qualify to use the CBLR and provide QCBOs with a larger buffer between their actual regulatory capital held and the CBLR requirement. In addition to encouraging broader adoption of the CBLR framework, the regulators believe this change would decrease the likelihood that stress losses would cause a QCBO to fall below the CBLR requirement and could even increase lending to agricultural and commercial borrowers.

Second, the Proposal would extend the grace period for a QCBO that fails to meet the qualifying criteria after opting into the CBLR framework. Under the current approach, a bank that fails to meet the definition of a QCBO has two quarters to re-qualify to use the CBLR framework, or else it is required to comply with the generally applicable capital requirements. The Proposal would extend that grace period from two quarters to four quarters, subject to the conditions that the bank maintains a minimum leverage ratio of at least 7% and not have used the grace period for more than eight of the previous 20 quarters.

Takeaways

The Proposal is likely to be adopted largely as proposed later this year. Overall, the proposal should prove to be helpful to many community banks. Nevertheless, the Proposal could have gone further by addressing some of the complexities associated with the CBLR framework. For example, community banks may find it burdensome to continually calculate nonbank asset and trading account ratios using the detailed instructions in the quarterly regulatory reports. The statute does not require the regulators to impose eligibility requirements based on those ratios, so eliminating those ratios could provide even further streamlining.

It is also worth noting that Congress is considering legislation to (i) increase the $10 billion eligibility threshold to $15 billion to make even more banks eligible for the CBLR framework, and (ii) grant the banking agencies the discretion to set a lower CBLR of between 6% and 8%. The prospects for the legislation are uncertain at this time.

Footnotes

1. The US federal banking regulators consist of the Board of Governors of the Federal Reserve System ("Federal Reserve"), the Office of the Comptroller of the Currency ("OCC"), and the Federal Deposit Insurance Corporation ("FDIC"). Federal Reserve, Joint Press Release (Nov. 25, 2025); OCC, Bull. 2025-40 (Nov. 25, 2025); FDIC, Board Meeting (Nov. 25, 2025).

2. Pub. L. 115-174 § 201, 132 Stat. 1296, 1306-7 (codified at 12 U.S.C. § 5371). QCBOs can include depository institutions or depository institution holding companies that satisfy the relevant criteria and opt into the framework.

3. 84 Fed. Reg. 61,776 (Nov. 13, 2019) (codified at 12 C.F.R. §§ 3.12, 217.12, 324.12).