A Capital Proposal That Could Unlock Community Bank Regulatory Relief

Michael Townsley, Esq. is a Senior Director of Regulatory Policy at the Conference of State Bank Supervisors (CSBS), where he works closely with state financial regulators on legislative, regulatory, and supervisory issues affecting the dual banking system. Prior to joining CSBS, Michael served as Senior Counsel in the Consumer Financial Protection Bureau's Office of Supervision Policy and was Director of Regulatory Policy and Policy Counsel at CSBS.

Bank capital rules are usually written in the language of ratios, floors, buffers, approaches, and risk weights. But recent proposed reforms to these rules make a straightforward argument for regulatory relief: what’s good for the goose is good for the gander. If the federal banking agencies are going to rethink the architecture of capital regulation for the biggest banks, they should use that same legal logic to simplify capital rules for community banks. 

From Two to One

The key move is buried in the agencies’ proposed shift from a “dual-stack” capital framework to a “single-stack” framework. Under the current system, the largest banks have to calculate capital under both the standardized approach and the advanced approaches, then satisfy the more binding result. That structure reflects the agencies’ longstanding reading of the Collins Amendment, the provision in the Dodd Frank Act that requires generally applicable capital requirements to serve as a floor. In practice, the standardized approach became the common floor for everyone. 

The proposal, which has drawn scrutiny, appears to change that approach. Rather than using one common risk-based floor for the entire industry, the agencies would allow different banks to live under different capital regimes. The largest banks would use the new expanded risk-based approach, or ERBA. Smaller banks could either opt into ERBA or remain under a revised standardized approach.  

This implies that the agencies have changed their minds about what the Collins Amendment requires. Gone is one identical capital calculation for all banks, replaced by a view that the law permits different methods so long as the chosen method is calibrated to ensure compliance with the relevant minimums. 

Cascading Changes

If this sounds very technical, it is. But it also has a big implication. If the agencies allow smaller banks to satisfy capital requirements through a different approach than the largest banks, then they can also expand the Community Bank Leverage Ratio (CBLR) framework. The CBLR is the simplified capital regime Congress created in 2018 for qualifying banks under $10 billion in assets. Instead of running through the full risk-based capital machinery, eligible banks can meet a simple leverage ratio and be treated as well-capitalized. 

The agencies’ new interpretation makes the current $10 billion threshold look less like a legal boundary and more like a policy choice. Previously, regulators suggested that Congress had to act because the Collins Amendment limited their ability to tailor capital rules for smaller institutions. Congress did act, by directing the agencies to create the CBLR.  

If the agencies now believe they have more flexibility under the Collins Amendment, then the CBLR should not be read as a ceiling. It required the agencies to create a simplified framework for a certain group of banks; it did not forbid them from making that framework available to a broader group. 

Just such a group needs the framework now. The static $10 billion threshold did not age well. Over time, inflation, nominal economic growth, and consolidation pushed more community-oriented banks above the line. Indeed, banks that were initially small enough to qualify for the CBLR have seen asset growth rates of around 33% since the CBLR went into effect in 2020, which is consistent with broader industry growth rates. The result has been a regulatory cliff. Banks pushed off — it became subject to a more complex capital framework simply because they grew with the economy. 

Growth Strategy

The agencies should make a one-time adjustment to the CBLR asset threshold and index it to nominal GDP or the GDP deflator going forward. That would turn the threshold from a fixed cliff into a moving line that better reflects the size of the economy and the banking industry. It would also align with the broader tailoring logic embedded in the proposal itself: rules should track risk, complexity, and business model — not just an outdated asset threshold. 

Community banks often do not need the same complex capital requirements as the largest, most internationally active institutions. For a small, non-complex bank, elaborate risk-based calculations can create compliance burden without adding safety and soundness. A leverage-based regime is not perfect, but for straightforward institutions that are sufficiently capitalized it is a better match: easier to administer, easier to supervise, and easier to explain. 

We should take the agencies’ own premise seriously. If the proposed capital rewrite depends on a more flexible reading of the Collins Amendment, then that flexibility should not be reserved for the largest, most complex institutions. It should also support a broader, better-indexed CBLR for community banks that serve our nation’s small businesses, farmers, and main streets. 

As the proposal opens the door to a more tailored capital regime, community banks should not be left out in the cold. 

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

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