On November 20, the Board of Governors of the Federal Reserve System (“Board”), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the “Banking Regulators”) issued the COVID Relief Rule, an interim final rule to provide temporary relief for community banking organizations with less than $10 billion in total assets as of December 31, 2019 (herein referred to as “Community Banks”). The relief came in the form of an exemption from certain regulations and reporting requirements that those institutions would otherwise become subject to as a result of a growth in asset size caused by their participation in federal coronavirus response programs and other side effects of the federal COVID-19 response. The COVID Relief Rule permits qualifying national banks, savings associations, state banks, bank holding companies, savings and loan holding companies, and US branches and agencies of foreign banking organizations to use asset data as of December 31, 2019, in order to determine whether various regulatory asset thresholds apply during the calendar years of 2020 and 2021. It also temporarily revises the instructions to various Board regulatory reports so that qualifying entities may use their December 31, 2019, asset data to determine reporting requirements for those reports in 2020 and 2021.

The COVID Relief Rule noted that Community Banks have played a large part in the nation’s response to COVID-19, with many realizing significant balance sheet growth as a result, in some cases by more than 25%. It noted that much of this growth is expected to be temporary, particularly as it relates to participation in the Paycheck Protection Program (PPP) and the PPP Liquidity Facility, involvement that impacted Community Banks more than larger financial institutions since the percentage of PPP loans originated by Community Banks organizations far exceeds their market share as a percentage of total banking system assets.

Nevertheless, the COVID Relief Rule stated that the outsized participation of Community Banks in the federal response to COVID-19 has pushed or will push many of those entities over an asset threshold that would subject them to additional regulation or reporting requirements without appropriate regulatory relief. Compliance with these additional burdens would impose significant transition and compliance costs on Community Banks, especially considering that, in many circumstances, their assets are expected to exceed those thresholds for a limited time. As a result, the COVID Relief Rule states that its purpose is to give those Community Banks with less than $10 billion in assets more time to either reduce their balance sheets by shedding temporary growth or prepare for higher regulatory and reporting standards that will apply to them beyond 2021.

In explaining the rationale for the COVID Relief Rule, the Banking Regulators stated that asset-based regulatory thresholds are meant to ensure that the applicable regulatory requirements are appropriate, given an institution’s likely risk profile and, in some cases, the potential risk that it poses to the financial stability of the United States. Since much of the growth of Community Banks in 2020 is likely to be temporary, particularly as it relates to PPP lending, the increase in assets currently held by those institutions may not reflect a change in their longer-term risk profile, thereby negating the necessity of placing the enhanced regulatory burdens on them.

Additionally, the Banking Regulators noted in the COVID Relief Rule that most of the affected Community Banks are unlikely to have planned for these additional regulatory burdens due to the rapid and unexpected nature of the COVID-19 emergency and its resulting asset growth, and the threat of these new burdens may force them to become reluctant to continue lending. Therefore, according to the Banking Regulators, the COVID Relief Rule should promote additional lending and further assist the economy during this crisis.

The COVID Relief Rule specifically provides that Community Banks may, through December 31, 2021, determine the applicability of certain asset-based regulatory thresholds using asset data as of December 31, 2019, if the institution’s assets as of that date were less than its assets on the date for which the regulatory threshold should be applied. As a result, asset growth during the calendar years 2020 and 2021 that is created by COVID-19 relief efforts should not trigger new regulatory requirements for Community Banks with less than $10 billion in total assets until January 1, 2022, at the earliest. The following table was included in the COVID Relief Rule and is a very useful tool for determining exactly which regulatory requirements a community banking organization may receive relief from under the COVID Relief Rule:

According to the COVID Relief Rule, the Community Banks that are below one of the above-listed asset thresholds as of December 31, 2019, generally will be deemed to remain below that threshold through the end of 2021, plus any applicable transition period provided by the regulation (e.g., the Board’s rules regarding debit card interchange fees and routing include a six-month transition period for institutions that exceed $10 billion in assets). However, the COVID Relief Rule makes it clear that the Banking Regulators retain a reservation of authority on each of the rules covered, which will allow them to address limited instances in which the regulatory burden relief would not be appropriate.

The reservation of authority will allow the Banking Regulators to require an institution to comply with a given regulatory requirement that would otherwise not be applicable to them under the COVID Relief Rule if the relevant agency makes an institution-specific determination that permitting the organization to utilize the COVID Relief Rule would not be appropriate based on its risk profile. In making this determination, the Banking Regulators will consider all relevant factors, including the extent of asset growth during 2020 and 2021, the causes of such growth (e.g., did it occur due to a merger or acquisition), whether such growth is likely to be temporary or permanent, whether the institution has become involved in any additional activities since December 31, 2019, that could pose additional risk, the asset size of any parent companies, and the type of assets held by the community bank. Specifically, the COVID Relief Rule states that a merger or acquisition following 2019 could be grounds for the exercise of this reservation of authority since such asset growth is planned, the affected institution will have had the opportunity to prepare for the additional regulatory burdens, and such asset growth is generally expected to be permanent.

Finally, in addition to the relief provided from certain regulatory requirements, the Board, through the COVID Relief Rule, also provided relief by temporarily revising certain of its reporting requirements that contain asset-based thresholds set at $10 billion or less, and this reporting relief applies to reports with as-of dates up to and including December 31, 2021. Reporting requirements covered by this additional Board relief include the Financial Statements for Holding Companies (i.e., FR Y-9 Reports) and the Statements of US Nonbank Subsidiaries of US Holding Companies (i.e., FR Y-11 and FR Y-11S). Below is a portion of another table included in the COVID Relief Rule that explains in more detail some of the reporting relief granted by the Board:

There is also certain reporting relief granted for US subsidiaries of foreign banking organizations and foreign subsidiaries of US banking organizations that has not been included in the table above. The Board retains a reservation of authority for this reporting relief that is similar to the one described above for other regulatory relief provided by the COVID Relief Rule.

Two prominent regulatory requirements not included in the COVID Relief Rule are the Volcker Rule and the supervisory authority of the Consumer Financial Protection Bureau (CFPB) that is triggered once an organization attains $10 billion in assets. According to the COVID Relief Rule, the Banking Regulators determined that it was not necessary to amend the Volcker Rule in order to provide temporary regulatory relief because it includes a two-year compliance period for any entity that newly becomes a “banking entity” covered by the rule, making the two-year regulatory relief provided by the COVID Relief Rule irrelevant for the purposes of complying with that requirement. As for CFPB supervision authority, a banking organization becomes subject to CFPB supervision and examination in the quarter after it reports assets of $10 billion or more for four consecutive quarters. While the imposition of CFPB supervisory authority on such an organization will undoubtedly result in a substantial increase in compliance costs, it appears that the CFPB believes any change to the application of the $10 billion threshold would require Congressional action.