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The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation, and the Federal Reserve Board (collectively, the “Agencies”) have jointly issued a Notice of Proposed Rulemaking (NPR) that, if finalized as proposed, could provide significant regulatory relief for community banks. The proposal seeks to lower the Community Bank Leverage Ratio (CBLR), which is a measure of the ratio of an institution’s tangible equity capital to its average total consolidated assets, from 9% to 8% for qualifying institutions and extend the grace period for non-compliance. The NPR was one of several measures by the OCC at the end of 2025 to tailor regulation, examinations, and data collection for community banks. Based on statements by agency leadership, community bank-focused reform efforts are expected to remain high on the regulators’ agenda for 2026.

What Is the CBLR and How Does it Impact Community Banks

The CBLR is a simplified capital framework designed for use by qualifying community banks - those with less than $10 billion in total consolidated assets and not otherwise disqualified from its use due to an agency’s assessment of the bank’s risk profile.  Qualifying community banks that meet the CBLR threshold are exempt from compliance with more complex risk-based capital requirements and are considered “well-capitalized” under the Agencies’ Prompt Corrective Action (PCA) framework, which requires banks to take specific remedial actions or subjects them to specific restrictions if the bank is not rated as “well-capitalized” under the PCA framework.

The Agencies introduced the CBLR in January 2020, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed in 2018. EGRRCPA requires the ratio to be set between 8-10%, and the Agencies by rule initially set its threshold at 9%.  The Agencies subsequently temporarily lowered the threshold during the Covid-19 pandemic and provided for a phased return of the CBLR to 9% by 2022. A qualifying community bank that uses the CBLR but that falls out of compliance with the threshold has a two-quarter grace period during which it can regain eligibility for use of the CBLR (provided currently that it has a CBLR ratio of at least 8%). Bank adoption of the CBLR has been mixed, with the NPR indicating only 47% of eligible banks have opted into the framework. Some qualifying institutions that have elected not to use the CBLR have cited the two-quarter non-compliance grace period as insufficient, as well as the operational challenges associated with moving in and out of eligibility.

Key Changes in the Proposed Rule

1. Lowering the CBLR to 8% from 9%
The proposed downward adjustment of the CBLR to its statutory minimum of 8% would allow more institutions to opt into the simplified framework, reducing regulatory burden. The Agencies noted that the reduction will still require maintenance with strong capital standards and that the 8% ratio is more stringent than the PCA framework’s Tier 1 risk-based capital requirement for well-capitalized status. They estimate the reduction will make 475 additional community banks eligible to use the CBLR, based on data from the second quarter of 2025.

2. Extended Grace Period
The proposal would extend the current two-quarter non-compliance grace period to four-quarters, with a cap of eight grace quarters used during any five-year period. The Agencies indicated the additional grace period was appropriate and reflective of the relatively greater challenges community banks face in accessing capital markets compared with larger institutions.

3. Eligibility and Limitations

To remain eligible for the grace period, the bank must maintain a leverage ratio of at least 7%. In addition, institutions involved in mergers cannot use the grace period, must provide pro forma risk-based capital ratios during the application process, and must be fully compliant with risk-based capital ratios in the quarter the transaction closes.

Why This Matters

The Agencies expect that lowering the CBLR to 8% and doubling the grace period for non-compliance will:

• increase participation in the simplified capital framework;
• provide community banks with greater lending capacity, and
• offer more flexibility during periods of economic stress.

The proposal was also part of broader regulatory initiatives in 2025 to lessen the regulatory and supervisory burden on community banks, as discussed in our prior blog article here.  Release of the NPR also followed shortly on the heels of the OCC:

• Issuing Community Bank Minimum Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) Examination Procedures that tailor the Federal Financial Institutions Examination Council’s (FFIEC) BSA/AML Examination Manual to community banks based on their generally lower levels of money laundering and terrorist financing risk. Among other things, the procedures allow examiners to (i) leverage the bank’s independent testing to support exam findings where appropriate and (ii) rely on and carry forward prior cycle exam findings related to the BSA Officer and Training procedures if the prior cycle findings were satisfactory; exam findings have not been carried over for two consecutive exams; and other specified conditions are met.
• Discontinuing annual mandatory data collection from community banks through the Money Laundering Risk System (MLR), which is not required from larger banks.
• Releasing a request for information (RFI) on the challenges that core or essential third party service providers may pose to community bank efforts to remain competitive, including to what extent the OCC’s supervisory guidance or practices may exacerbate these concerns. The OCC indicated the RFI was driven by concerns commenters raised in responding to the OCC’s May 2025 RFI related to community bank digitalization, as well as community banks’ reliance on third parties to provide and support online functions.

Shortly after the CBLR NPR was issued, the OCC then put supplemental guidance out for public comment aimed at making the strategic plan alternative to OCC examination of Community Reinvestment Act (CRA) performance more accessible to community banks. While the OCC typically uses a combination of performance tests, banks alternatively can develop a strategic plan for meeting their CRA obligations in consultation with members of the public, publish the plan for public comment, and include in the plan annual interim measurable goals. The OCC attributed historically low community bank use of this strategic plan alternative to its complexity and the need to hire external consultants. The proposed guidance would remedy this by, among other things, including examples of elective measurable goals a community bank could adopt, while retaining flexibility for a bank to design custom goals based on its unique circumstances.

Similar reform efforts by the Federal Reserve may be forthcoming. In a January 7 speech, Vice Chair for Supervision Michelle Bowman highlighted potential actions to separate the Federal Reserve’s community bank supervision program from those for larger banks, paring back data collection efforts, and streamlining applications to engage in mergers and other activities.