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Relief for Community Banking Organizations Experiencing Unexpected Asset Growth
compiled by Virginia Gibbs, Lead Financial Institution and Policy Analyst, Community Bank Supervision – Communications Section, Division of Supervision and Regulation, Board of Governors of the Federal Reserve System*

Community banking organizations have played an instrumental role in the nation’s financial response to the coronavirus disease 2019 (COVID event). In some cases, community banks’ participation in federal coronavirus response programs — such as the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) — and efforts to work with their customers have contributed to a rapid and unexpected increase in banks’ assets. As a number of federal banking regulations contain asset-based compliance thresholds, a community banking organization may have found itself subject to new regulatory requirements that the organization would not have anticipated at the beginning of 2020.

Asset-based thresholds in regulations are designed, in part, to appropriately calibrate regulatory requirements given a banking organization’s risk profile and, in some cases, the potential risk that the banking organization poses to U.S. financial stability. However, the balance sheets of community banking organizations may have grown, in many instances temporarily, as a result of banks’ responses to the COVID event. Therefore, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) have provided temporary regulatory and reporting relief to community banking organizations to address the consequences of the unanticipated asset growth in 2020. These relief efforts provide community banking organizations with more time for their balance sheets to return to precrisis levels. If a bank expects its asset growth to be long lasting, a bank has additional time to assess its options and either plan to reduce its assets or prepare for any additional regulatory and reporting standards.

This article provides an overview of the actions taken by the agencies to provide temporary regulatory and reporting relief to those community banking organizations experiencing unexpected asset growth during the COVID event.

Regulatory Relief

On December 2, 2020, the agencies published in the Federal Register an interim final rule (referred to as the “interagency interim rule”) to permit community banking organizations¹ as of December 31, 2019, to use asset data as of December 31, 2019 (referred to as the “measurement date”), to determine the applicability of various regulatory asset thresholds during calendar years 2020 and 2021.² This means that asset growth in 2020 or 2021 will not trigger new regulatory requirements, including reporting requirements, for these community banking organizations until January 1, 2022, at the earliest.³

The agencies limited this regulatory burden relief to community banking organizations, as these organizations have fewer resources available to prepare for and comply with previously unanticipated regulatory requirements, especially during a time of economic uncertainty and disruption. Further, community banking organizations have originated a disproportionately large percentage of PPP loans, as compared with these organizations’ market share as a percentage of total banking system assets. According to SBA statistics, all lenders with less than $10 billion in assets collectively originated 2.7 million PPP loans totaling $233.7 billion and represented more than 52.6 percent of the number of loans originated under the program.⁴ The low risk of the PPP and the likelihood that many PPP loans will be forgiven in the near term means that an increase in asset size at community banking organizations during the COVID event is likely to be temporary and less likely to reflect a change in an organization’s risk profile or business activities.

This temporary regulatory relief is automatically available to all community banking organizations. However, in the Federal Register notice for the interagency interim rule, the agencies noted that there may be limited instances, such as when a bank’s assets increased as a result of a merger or acquisition, when it may be appropriate for an agency to deny the relief with respect to an individual institution.⁵ As explained in the notice, the agencies retained the discretion to determine whether a community banking organization is ineligible for relief with respect to one or more asset thresholds. For a Federal Reserve–supervised institution, it is expected that the reservation of authority would be invoked only in exceptional cases, and the Federal Reserve Board would be required to make an institution-specific determination that an institution is ineligible for the relief based on its risk profile.

For a summary of the Board regulations with asset-based regulatory thresholds that were addressed by the interagency interim rule, see the table under “Section II. Discussion, A. Interim Final Rule” at www.federalregister.gov/documents/2020/12/02/2020-26138/temporary-asset-thresholds.

There are also supervisory guidance documents that include asset-based thresholds of $10 billion or below. In the Federal Register notice of the interagency interim rule, the agencies confirmed that thresholds included in supervisory guidance documents for community banking organizations are exemplary only and not suggestive of requirements, and noted that they will take the same perspective on asset-based thresholds in guidance that they are taking with regard to asset-based regulatory thresholds.

Regulatory Reporting Relief

The Reports of Condition and Income (Call Reports) contain various total asset thresholds that are measured annually as of the June 30 report date and trigger additional reporting requirements once an institution crosses a threshold, generally starting with the reports for the first calendar quarter of the next calendar year.⁶ Therefore, similar to the relief provided in the interagency interim rule, the agencies issued a proposal to temporarily revise applicable Call Report instructions to provide reporting relief for those community banking organizations experiencing a temporary asset growth.⁷

As explained in the proposal, an institution would be permitted to use the lesser of its total assets as of December 31, 2019, or as of the current quarter-end report date to determine whether it meets the $10 billion total asset threshold.⁸ For the Call Reports through December 31, 2021, a community banking organization would be permitted to determine the applicability of asset-based reporting thresholds set at $10 billion or lower by using asset data as of December 31, 2019, if the bank’s assets as of that date were less than its assets on the date as of which the applicability of a given threshold would normally be determined.⁹

The proposed revisions to the Call Reports would not affect the substantive reporting instructions for any item, schedule, or report. Rather, this proposed action merely affects which institutions are required to submit certain items, schedules, or reports. The proposal notes that the agencies reserve the authority to determine that relief would not be appropriate with regard to a specific institution.

As part of the Federal Register notice¹⁰ for the interagency interim rule, the Federal Reserve also temporarily revised the reporting instructions for a number of its regulatory reports to provide that community banking organizations will be permitted to determine the applicability of asset-based reporting thresholds set at $10 billion or less using asset data as of December 31, 2019.¹¹ Therefore, a community bank holding company’s asset growth in 2020 or 2021 will not trigger new reporting requirements until January 1, 2022, at the earliest.¹²

Community Bank Leverage Ratio Eligibility

The agencies have previously adopted rules permitting institutions that meet certain criteria to use the community bank leverage ratio (CBLR) framework to measure such institutions’ regulatory capital.¹³ As part of the interagency interim rule, the agencies have revised their capital rules to allow a community banking organization that temporarily exceeds the $10 billion total asset threshold to use the CBLR framework from December 31, 2020, to December 31, 2021, provided the bank meets the other qualifying criteria for the CBLR framework. Therefore, as explained in the agencies’ notice on proposed changes to the Call Reports, a bank that qualifies for and elects to use the CBLR framework under this temporary relief should report CBLR information in Call Report Schedule RC-R, Part I, except that item 32 (Total assets) on that schedule should reflect the lesser of the bank’s total assets as of December 31, 2019, or as of the quarter-end report date.¹⁴

FDIC Audit Requirements Relief

On October 20, 2020, the FDIC approved an interim final rule to provide temporary relief from the audit and reporting regulatory requirements (12 CFR 363) for insured depository institutions (IDIs) that have experienced temporary asset growth due to participation in federal coronavirus response programs.¹⁵ Pursuant to the FDIC’s interim final rule, an IDI determines whether it is subject to the audit and reporting requirements for fiscal years ending in 2021 based on the lesser of its (a) consolidated total assets as of December 31, 2019, or (b) consolidated total assets as of the beginning of its fiscal year ending in 2021.¹⁶ The intent of the FDIC’s interim final rule is to neutralize burdens that IDIs may incur or have incurred because of temporary increases in their consolidated total assets resulting from participation in recent COVID event-related stimulus activities. The FDIC reserved the authority to require an IDI to comply with one or more 12 CFR 363 requirements if the FDIC determines that asset growth was related to a merger or acquisition.¹⁷

Conclusion

Community banking organizations continue to support the U.S. economic recovery from the COVID event. In some cases, a community banking organization may find that this activity has resulted in an unexpected increase in its assets that could trigger additional regulatory or reporting requirements. Therefore, agencies have provided regulatory and reporting relief to help community banking organizations manage this unplanned and temporary asset growth. A community banking organization with questions on the interagency interim rule or other regulatory relief should contact its primary federal regulator. In the case of Federal Reserve–supervised institutions, bankers should contact their point of contact at their local Reserve Bank.