A More Flexible Capital Framework: The CBLR and Risk-Based Weightings

Regulation

In New England, we are moving out of the winter season, despite what the nearly 30-foot snow pile I see when looking out our office window would indicate. The colors are starting to brighten, and optimism is brimming as warm weather is approaching. I know in my house, we are looking forward to nicer weather that will allow opportunities to get the family outside.

On the theme of seasons changing and providing more flexibility in day-to-day planning, I want to explore both recently finalized as well as proposed regulation changes on the capital front. These changes are aimed at providing community banks with additional flexibility in reporting and balance sheet management.

This Bulletin will review finalized changes to the Community Bank Leverage Ratio (CBLR) as well as potential changes to risk-based weightings.

I recently had dinner with a client on the banks of the Mississippi River in Minnesota. This particular “supper club” was founded in the early 1960s and was constructed in a floodplain. Our client pointed out to me the levels to which waters had reached over the years, including an April1965 flood that saw the river crest at 26 feet.

It’s almost unfathomable to me that water could reach these levels!

Our client noted that although they had incorporated design features over the years to deal with the occasionally high-water levels, they also constructed a bar underneath at ground level to accommodate more guests.

In a way, I can’t think of a better analogy for the duality of potential disaster and opportunities for growth in banking than capital management.

In this month’s Bulletin, DCG Managing Director Joe Bona highlights some of the changes both finalized and proposed by regulators for capital. Joe focuses primarily on the Community Bank Leverage Ratio framework (“CBLR”) and the intent of regulators to have more banks “adopt” this approach.

He highlights the original objective of the CBLR, proposed changes, and implications for banks that adopt the potential revised capital minimums.

Capital policies should be designed to determine the appropriate level of capital to be held in reserve against potential losses, but also provide “dry powder” for when growth opportunities present themselves.

So, whether your institution views capital through the lens of a “catastrophic flood” or an “open bar,” Joe’s summary is a terrific read to determine what might be prudent for your business.

Vinny Clevenger, Managing Director

Background on the CBLR

Through the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, Congress instructed that changes be made to capital rules in response to concerns that “small banks faced unnecessarily burdensome capital requirements.”  

In 2019, the Fed, the FDIC, and the OCC issued a final ruling (effective January 2020) establishing the CBLR as an optional framework that allowed qualifying institutions the ability to avoid complex risk-based capital calculations and still maintain “well-capitalized” status.

Ultimately, the collective regulatory agencies established 9% as the capital minimum for those “opting into” this method of reporting capital.

What Changes Are Coming to the CBLR?

The CBLR framework was designed with the goal of simplifying capital requirements for banks without inhibiting safety and soundness.

Federal Reserve Vice Chair for Supervision Michelle Bowman commented in the summer of 2025 that adoption “underachieved in providing regulatory relief.” 

As of the second quarter of 2025, the adoption rate for the CBLR was approximately 40%, suggesting that the remaining institutions felt the framework did not fit their overall business / strategy.

An institution with a lower risk-weighted asset mix may prefer the risk-based calculation, as it potentially may provide more latitude with strategic growth plans versus managing to a ratio driven by total asset levels.

For groups looking into acquisitions, balance sheet repositioning, or planning for robust growth, the constraints of the CBLR may be challenging (previous 9.00% minimum), with concern that if notable balance sheet expansion occurs, the institution would need to quickly shift to reporting risk-based capital metrics.

Essentially, those using the CBLR framework were required to hold more capital in reserve than traditionally accepted for the tradeoff of a slightly reduced reporting burden.

In order to increase adoption, a rule supported by the Fed, FDIC, and OCC is now finalized (effective July 1, 2026) that lowers the threshold for the Tier 1 Leverage Ratio to 8.00%. For those who temporarily fall below the minimum of 8%, the grace period has been extended to 4 quarters (versus the current criteria of just 2 quarters). Additionally, the grace period “floor” is has been dropped to 7.00%.

The agencies estimate that a total of 95% of community banks would qualify to adopt the CBLR under this revised framework (versus an estimate of 84% as of the second quarter of 2025 under the previous construct).

Both the Independent Community Bankers of America and the American Bankers Association had voiced support for reducing the CBLR framework from 9.00% to 8.00%.

It should also be noted that there is an additional proposal from Rep. Young Kim’s House Financial Services Committee (The Community Bank Leverage Improvement and Flexibility for Transparency Act) that would lower the CBLR range to 6-8% and authorize banks up to $15 billion in assets to adopt.

Implications of CBLR Changes

The goal of lowering the CBLR framework to 8.00% is to increase adoption, ultimately allowing additional banks to reduce the regulatory burden around capital reporting (and realize a regulatory cost savings related to not having to calculate risk-based metrics). Through the lowering of the threshold and extending the grace period, banks could also theoretically increase lending capacity and have a greater runway to expand their balance sheets.

Bowman has highlighted this point, noting that reducing the minimum would allow community banks more flexibility in supporting their local communities. These changes may also lower the likelihood that a bank would need to quickly shift to calculating and reporting risk-based capital figures as they have more time to comply with the CBLR framework or to calculate / achieve compliance with risk-based capital requirements.

The agencies also outlined potential challenges that could come from this change. With the limit reduced, could a lower capital requirement translate to a greater amount of risk (e.g., opportunities for banks to push capital ratios lower or make more risky credit decisions)?

Another potential challenge is that with the elongated grace period, necessary capital adjustments could be slowed for banks, ultimately leading to additional supervisory action. FDIC Chairman Travis Hill noted that the limitation on the number of times a bank could fall in the grace period should ensure the grace period is not abused. Further, the agencies “anticipate that the benefits of the proposal justify the costs.”

If Not the CBLR…

For groups that have not qualified for the CBLR and/or have not adopted the framework, changes could also be coming to the standardized approach.

In March of 2026, the Fed, the FDIC, and the OCC jointly issued a notice of proposed rulemaking. The primary implications in the community bank space relate to proposed changes to risk-based capital requirements, specifically for residential mortgages, corporate exposures, and several other asset categories. Notably on the residential mortgage front, the risk weight would now be driven by more granular risk factors (specifically a loan-to-value based approach).

The proposal includes a change to the definition of regulatory capital that would remove the threshold-based deduction of mortgage servicing assets (MSAs) for all groups subject to the regulatory capital rule, including groups that have opted into the CBLR.  For those that do not opt for or do not qualify for the CBLR framework, the proposal would call for a 250% risk weight for all MSAs.

What Does All This Mean?

With a lower threshold for CBLR, coupled with potentially more favorable changes in risk-weighted asset calculations, the goal of the regulatory agencies is for banks to have more agency in the capital calculations they elect to report. The ultimate reporting path each bank takes will depend on its unique circumstances and several factors, including capital levels, growth plans, and asset mix composition, among others.

The good news is, much like the flexibility the nicer weather will provide my family in our day-to-day planning, the finalized change to the CBLR and the potential for adjustments coming to risk-weighted asset calculations may provide more flexibility to banks to expand their balance sheets and extend credit to their communities.

For more information about capital frameworks and how regulatory changes may impact balance sheet management, contact us to speak to the DCG consulting team.

For more insights from Darling Consulting Group, click here.

Joe Bona is a Managing Director at Darling Consulting Group. In his role, he assists banks and credit unions of all sizes nationwide with asset/liability management. He works with management teams to develop institution-specific strategies to improve financial performance while effectively managing interest rate risk, liquidity, and capital through the ever-changing economic and regulatory environment.

Joe began his career at DCG in 2015 as a financial analyst. He earned a B.S. in business administration from Bryant University.

© 2026 Darling Consulting Group, Inc.