Fed Outlines Community Bank Reforms: CBLR Flexibility & Mutual Bank Support

In her speech “Community Banking: Looking Toward the Future,” delivered October 9, 2025, Michelle W. Bowman called for fundamental reforms to how community banks are defined, regulated, and supervised in the U.S. banking system. She highlighted problems created by rigid asset thresholds, overly broad supervisory requirements, and unclear processes—especially around capital, applications review, and mutual bank capital instruments. [1]

One central theme Bowman raised is that fixed asset thresholds used to distinguish regulatory categories are increasingly misaligned with bank risk profiles due to inflation and growth. As small banks cross these static thresholds, they can get pulled into regulatory burdens designed for larger, more complex institutions—even though their operations remain materially similar. She proposes indexing thresholds to inflation or growth to preserve policy intent over time. [1]

Another key component is the Community Bank Leverage Ratio (CBLR) framework. Though designed as an optional, simpler capital regime, Bowman criticized its original calibration, saying it focused too much on how many banks would be eligible rather than on whether the capital relief meaningfully served community banks. Changes proposed later in the year (November 2025) reflect this critique: lowering required CBLR levels, enlarging buffers, and extending grace periods before risk-based capital regimes kick back in. [6][7]

Bowman also criticized the opacity and complexity of regulatory applications, supervisory processes, and the treatment of mutual banks. She emphasized the need for regulators to clearly define standards, provide public templates (such as those issued for mutual bank capital), and reduce delays that hurt bank operations and M&A outcomes. [1][3]

Related regulatory and supervisory agencies are already advancing reforms aligned with Bowman’s vision. Notably, the OCC announced steps in October 2025 to tailor examination scope and frequency, adjust model risk management guidance for community banks, and reduce duplicative reporting requirements. Similarly, the FDIC proposed rules to adjust thresholds for inflation and to automate periodic adjustments under certain conditions. [3][10][7]

Strategic implications:

• Community banks that currently hover just over regulatory thresholds may gain relief, competitive parity, and reduced compliance costs under proposed reforms, but banks will need to monitor whether final rules adopt Bowman’s indexed thresholds and expanded grace periods in full.
• Mutual banks, which historically have had fewer capital-raising options, now have templates and potential routes to issue Tier 1 common or additional Tier 1 equity. This could improve their resilience and flexibility in capital management.
• From an investment banking perspective, bank M&A, licensing, de novo startup activity, and mutual conversion/recapitalization efforts may accelerate under more predictable and tailored regulatory conditions. Delays and uncertainty in applications have been cited as friction points.
• However, there’s risk that regulatory tailoring may under-price material but rare risks, and that less rigorous oversight may lead to unforeseen vulnerabilities if not carefully calibrated. Observers will be watching how “material financial risk” is defined and how supervisory transparency evolves.

Open questions:

• Will indexing of thresholds be ratified in final rules and applied uniformly across asset‐based thresholds used by Fed, FDIC, OCC?
• How will capital relief interact with inflation, interest rate volatility, and balance sheet pressures? Will lowered CBLR requirements still ensure safety and soundness?
• What definitions and metrics will determine “material financial risk” in supervision, and how will supervisory ratings / findings be adjusted in practice?
• How comprehensive will mutual bank capital reforms be—will they be optional, burdensome, or broadly accessible?
• What effects will these reforms have on competition between community banks, non-bank fintechs, credit unions, and larger banking entities?