Community banks are walking a new regulatory tightrope. After a decade of alternating regulatory relief and new rules, the federal compliance framework meant to simplify capital reporting is now testing how much simplicity the system can withstand, affecting banks and small businesses.
Regulators may call it simplification, but the Community Bank Leverage Ratio (CBLR) – a capital rule for banks that compares how much money it holds against money it has loaned – isn’t a free pass but a guardrail.
That’s the takeaway from Ashley Elmore Drew, a financial services attorney with 15 years of experience in compliance and litigation, who works with local banks in St. Pete, and says the next phase of community bank regulation will hinge on balance: less paperwork but closer scrutiny.
“The CBLR should be viewed as a bank-side reporting simplification, not a signal of looser credit discipline,” Drew said. “Even if a bank elects the CBLR, examiners should continue to scrutinize risk management, concentration levels and underwriting.”
Created under the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act, introduced by Senator Mike Crapo, the CBLR lets smaller banks – those with assets under $10 billion – sidestep complex risk-based capital formulas by maintaining a straightforward leverage ratio above 9 percent.
Drew says the framework is optional only on paper. It comes with firm caps: off-balance-sheet exposures can’t exceed 25 percent of assets and trading activity must remain limited.
The idea, she says, was to make reporting easier without eroding capital discipline. “It operates as a backstop rather than a relaxation of standards.”
When asked why the threshold hasn’t been lowered – even though it could expand lending capacity by roughly 12 percent – Drew points to risk. “A pure leverage ratio does not take risk into consideration,” she said. “Dropping it too low could encourage riskier asset mixes and leave some banks undercapitalized relative to their risk.”
Simplicity, it appears, has limits. The 9 percent line serves as the equilibrium between flexibility and safety, a hedge against the kind of overextension that defined the last financial crisis.
While capital rules stay tight, new reporting demands are stacking. The CFPB Section 1071 small business data rule and the Corporate Transparency Act are forcing community banks to modernize fast.
Drew’s advice is to start early. “Prioritize developing a streamlined and auditable §1071 program – data governance, firewall design, loan origination system readiness and borrower communications – and conduct phased testing well in advance,” she said.
At the same time, banks must update Know Your Customer and Beneficial Ownership procedures to align with the CTA and FinCEN’s Customer Due Diligence rules. She suggests tracking litigation and agency updates continuously, either in-house or through an external compliance firm.
Community banks have always thrived on personal connections, but Section 1071 adds a layer of data collection that makes those relationships feel less personal.
“They’re using standardized self-service collection so that application data is consistent,” Drew said. “They also use role-based access to limit an underwriter’s exposure to demographic data.”
Her advice for borrowers: keep the lunch meetings but don’t expect your banker friend to decide the loan. “Your lunch date will not be making credit decisions,” she quipped.
Under the Current Expected Credit Losses (CECL) accounting standard, banks now evaluate creditworthiness like a forecast rather than a snapshot.
Small businesses that can prove consistency – steady cash flow, up-to-date financials, diversified revenues – will earn better loan terms. Those with unpredictable income streams may face tighter collateral requirements.
“If capital or liquidity tightens,” Drew noted, “banks that choose CBLR may respond with higher pricing, tighter covenants, more collateral and shorter maturities.”
The future of bank oversight, Drew says, is anyone’s guess. The Community Reinvestment Act’s modernization is paused, and it’s unclear whether Washington’s next move will be reform or retrenchment.
“Only a time-traveler could predict what will happen at the federal regulatory level,” Drew stated. “But I anticipate steady and potentially strengthening supervisory scrutiny of credit, liquidity and interest rate risk – alongside some streamlining where there are large fixed costs such as initial compliance buildout.”
For community banks, that means preparing for both outcomes: leaner paperwork but no lighter touch from examiners; for small businesses: keeping books clean, cash flows predictable and relationships alive.