Fed proposes 3-year phase-in for effects of CECL on regulatory capital

Providing an option to phase in over three years the effects on regulatory capital of the new current expected credit loss (CECL) accounting standard is the aim of a notice of proposed rulemaking issued by the Federal Reserve Friday.

The proposal, the Fed said, addresses the regulatory capital treatment of credit loss allowances under the CECL methodology and would allow banking organizations to phase in the day-one regulatory capital effects of CECL adoption over three years.

In its notice, the Fed said that, specifically, the proposal would revise its regulatory capital rules to identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

The agency notice said the proposal would also amend certain regulatory disclosure requirements to reflect applicable changes to U.S. generally accepted accounting principles (GAAP) covered under the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2016-13.

In addition, the Fed said, it is proposing to make amendments to stress testing regulations so that covered banking organizations that have adopted ASU 2016-13 would not include the effect of ASU 2016-13 on their provisioning for purposes of stress testing until the 2020 stress-test cycle.

The agency said it is also proposing to make conforming amendments to other regulations that reference credit loss allowances.

CECL is an accounting standard issued by FASB in 2016; it is scheduled to begin taking effect next year. The CECL standard, the Fed noted, replaces the existing incurred-loss methodology for certain financial assets.

The notice was issued with a 60-day comment period.

The Fed’s proposal is coordinated with rulemaking being taken by the Federal Deposit Insurance Corp. (FDIC, which is considering a similar notice at its board meeting next week) and the Office of the Comptroller of the Currency (OCC).

Federal Reserve Board approves proposal to revise regulatory capital rules to address and provide an option to phase in the effects of the new accounting standard for credit losses