Our Position

Regulatory Capital

Our Position

  • ICBA supports strong capital requirements for all banks and their respective holding companies.
  • ICBA supports the community bank leverage ratio (CBLR), which was included in S. 2155 and implemented in 2019. The CBLR will provide relief for qualifying community banks from the most burdensome aspects of Basel III. ICBA was disappointed that the CBLR was set at 9 percent and not 8 percent.
  • Basel III continues to be punitive and to inhibit lending for community banks that do not elect or do not qualify for the 9 percent CBLR. ICBA supports a full exemption from Basel III for non-systemically important financial institutions (non-SIFIs) or amendments as discussed in the background of this resolution.
  • Capital standards should not disadvantage community banks relative to credit unions.
  • Banking regulators should not impose liquidity coverage ratio restrictions on high-quality investment securities that would impact the liquidity of those securities for community banks. ICBA supports Congress’ efforts to expand the types of municipal securities that can be categorized as high-quality liquid assets when calculating a bank’s liquidity coverage ratio. ICBA also believes that Fannie Mae and Freddie Mac securities should qualify as high-quality liquid assets.
  • Banking regulators should propose capital modifications that ease the burden of COVID-19-related credit losses and fair value declines on investment securities.


Basel III
The originally proposed Basel III capital rules failed to recognize that community banks were not the cause of the financial crisis of 2008-09. Their simplified balance sheets, conservative lending, and common-sense underwriting shielded their regulatory capital from the losses incurred by large, complex, internationally active and interconnected financial institutions. ICBA achieved major victories in the final Basel III rule.

In addition, the new community bank leverage ratio (CBLR) will allow banks with total consolidated assets of less than $10 billion to escape the regulatory burden of Basel III by adopting a simple, straightforward capital calculation. ICBA is disappointed that the CBLR was set at 9 percent rather than 8 percent. As such, many community banks continue to be subject to Basel III. For this reason, ICBA seeks amendments to the rule as described below.

Recognition of ALLL Loss Absorption
Basel III largely fails to recognize the loss absorption abilities of ALLL and does not permit its inclusion in tier 1 capital. This failure is based on the agencies’ erroneous view that the allowance represents losses already present within a financial instrument. FASB’s CECL accounting guidance clarifies that the allowance actually represents the first layer of the capital cushion to absorb bank losses. As such it should be included in tier 1 capital.

Moreover, because the CECL accounting guidance requires the allocation of more capital to ALLL, it results in a larger omission from tier 1 regulatory capital calculations. ALLL should be included in tier 1 capital in an amount up to 1.25 percent of risk weighted assets, and the remaining balance of ALLL should qualify for inclusion in tier 2 capital. (ICBA policy resolution titled: “Current Expected Credit Loss Model” recommends a five-year transition period for regulatory capital calculations at the point that a bank adopts CECL.)

Basel III Punishes Mortgage Servicing
Basel III punishes community banks that service mortgage loans by severely lowering the threshold deduction for holding mortgage servicing assets (MSAs) as well as almost tripling the risk weight assigned to MSAs when they are not deducted. The threshold deductions for mortgage servicing assets should be raised from 25 percent of common equity tier 1 capital to 50 percent of tier 1 capital.

Additionally, for mortgage servicing assets that are not deducted, the risk weight should be restored to 100 percent from the overly punitive 250 percent. Regulators have not presented any evidence that community bank MSAs made any contribution to the financial crisis of 2008 and 2009. In fact, in an environment where banks are being asked to consider interest rate sensitivity in their balance sheets, MSAs are a natural hedge against rising interest rates. Regulators must recognize the value of MSAs and adjust deductions to a level closer to their pre-Basel III levels for both the current regulatory capital framework and the community bank leverage ratio.

High Volatility Commercial Real Estate
ICBA supports a more narrow definition of HVCRE in response to the passage of S. 2155. This important legislation has allowed community banks to appropriately assign the 100 percent risk weight to quality acquisition, development and construction (AD&C) loans that would otherwise face capital surcharges. ICBA favors removal of the HVCRE designation altogether for community banks.

Regulators have not demonstrated heightened risk with HVCRE loans, especially those originated by community banks. Well underwritten AD&C loans promote construction industry job creation and economic development in communities across the country. ICBA opposes agency actions to expand the definition of HVCRE loans based on their land development characteristics in a financing transaction.

High Quality Assets Must Be Recognized Under Liquidity Coverage Rules
ICBA believes that municipal debt as well as Fannie Mae and Freddie Mac mortgage-backed securities should be categorized as high-quality liquid assets, commensurate with their treatment in the capital markets, under liquidity coverage ratio rules. Failure to so categorize these widely held securities will reduce their liquidity and adversely impact their fair values.

Staff Contact

James Kendrick

First Vice President, Accounting and Capital Policy

Washington, D.C.