UPDATED: Comptroller, Fed, FDIC propose capital reg on transition to new credit-loss (CECL) standard

The banking agencies’ proposed rule allows a phase-in of capital effects under CECL. The new credit-loss standard begins taking effect for fiscal years beginning after Dec. 15, 2019. (The above chart is in the proposed rule notice.)

A proposed rule addressing the effects of the new current-expected-credit-loss (CECL) accounting standard on banks’ regulatory capital is being issued by the three federal banking regulators through a notice in the Federal Register. Comments are due July 13.

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Fed), and the Federal Deposit Insurance Corp. (FDIC) are inviting public comment on a joint proposal to address changes to U.S. generally accepted accounting principles (GAAP) described in Accounting Standards Update No. 2016-13, Topic 326, Financial Instruments—Credit Losses (ASU 2016-13, published by the Financial Accounting Standards Board [FASB]), including banking organizations’ implementation of the current-expected-credit-losses methodology.

The proposal would identify which credit loss allowances under CECL are eligible for inclusion in regulatory capital. It also would provide banking organizations the option to phase in the day-one adverse effects on regulatory capital that may result from the adoption of CECL, so capital increases associated with CECL implementation could be phased in over time.

This phase-in option would have to be elected in the quarter that the institution first reports its credit loss allowances as measured under CECL. If the election isn’t made then, it would no longer be available, and the bank would be required to reflect the full effect of CECL in its regulatory capital ratios as of the banking organization’s CECL adoption date. “For example, a banking organization that adopts CECL as of January 1, 2020, and does not elect to use the CECL transition provision in its regulatory report as of March 31, 2020, would not be permitted to use the CECL transition provision in any subsequent reporting period,” the proposal states.

Under the proposal, a depository institution holding company subject to the Fed Board’s capital rule and each of its subsidiary insured depository institutions would be eligible to make a CECL transition provision election independent of one another.

In other provisions, the proposed rule would:

  • amend certain regulatory disclosure requirements to reflect applicable changes to U.S. GAAP covered under ASU 2016-13;
  • amend stress testing regulations so 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; and
  • make conforming amendments to their other regulations that reference credit loss allowances.

OCC/Federal Reserve/FDIC Proposed Rule – Regulatory Capital Rules: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rules and Conforming Amendments to Other Regulations

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