Small banks could soon be able to increase their debt load, potentially unlocking capital for commercial real estate development that has been sidelined for years.
President Donald Trump’s administration is considering a plan to cut the allowable leverage ratio — the proportion of a company’s debt to its equity, assets or earnings — for community banks to 8%, down a percentage point from current levels, Bloomberg reported.
The proposal is part of a broader effort to cut banking regulations at the White House in a move to boost lending volume. Banks with up to $10B in assets can either use the leverage ratio cap or standards related to risk-based measures in their portfolios to stay in compliance with regulators.
Small- and medium-sized banks have been lobbying for years to loosen the community bank leverage ratio, or CBLR. The institutions, and their larger siblings, largely retreated from commercial real estate debt in 2023, blaming the tight lending standards and other regulations put in place after the Global Financial Crisis.
Other capital sources — especially private equity funds — stepped in to fill the gap, but debt cost and availability have held back construction starts across practically every real estate sector in the postpandemic era, even before a trade war added further volatility to development pricing.
Some critics of the program, including Federal Reserve Vice Chair for Supervision Michelle Bowman, have said the CBLR is too restrictive to realize its full potential. Of the 4,022 community banks across the country, 1,662 lenders have opted to use the standard instead of the internal portfolio-based limits, Bowman said in an August speech at a conference in Colorado.
“In my view, it is time to consider modifications to the CBLR framework that make it a more attractive framework and will encourage more banks to adopt it,” she said.
The proposal to lower the leverage cap would be subject to public comment and is expected to be jointly proposed by the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, anonymous sources told Bloomberg.
The Trump administration was elected on a platform that included wholesale deregulation. Since arriving at the White House, it has moved to loosen restrictions on everything from energy production to showerheads.
Large lenders are also expecting regulatory walls to come down, and their own leverage ratio to be potentially relaxed, as part of the White House’s ongoing overhaul of banking regulations.
"You're going to see here the most aggressive streamlining or easing of bank regulations that we've seen certainly since Dodd-Frank and probably sometime before that," Ian Katz, managing director at Capital Alpha Partners, told Reuters earlier this month.
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