Up to 2,400 join teleconference about proposed rules dealing with CECL transition

About 2,400 bankers and others joined a teleconference sponsored by federal bank regulators Tuesday to hear details about new capital rules proposed by the agencies to help financial institutions prepare for new accounting standards that begin taking effect next year.

In Tuesday’s call, staff from the three agencies noted that the key aspects of the proposal would:

  • Revise the capital rule to identify which credit loss allowances under the new accounting standard would be eligible for inclusion in the regulatory capital of banking organizations;
  • Introduce the definition of a new regulatory capital term, allowance for credit losses (ACL);
  • Revise the regulatory capital definition of carrying value for available-for­sale (AFS) debt securities and purchased credit-deteriorated (PCD) assets;
  • Provide banking organizations with the option to phase in, over a three­-year period beginning from its CECL effective date, any “day-one” potential adverse effects on regulatory capital stemming from the accounting changes;
  • Revise affected disclosure requirements for certain banking organizations.

The teleconference, sponsored by the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and the Office of the Comptroller of the Currency (OCC), focused on proposed rules to provide an option to phase in over three years the effects on regulatory capital of the new current expected credit loss (CECL) accounting standard, as adopted by the Financial Accounting Standards Board (FASB).

Under the proposal, the agencies would revise their 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 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.

Another key part of the proposal (issued for a 60-day comment period, which began Monday (May 14) upon publication in the Federal Register; comments due July 13), is the transition for a financial institution to the new accounting standard using the three-year phase in. According to Tuesday’s presentation, the transition provision notes:

  • Upon adopting CECL, a banking organization will record an adjustment to its credit loss allowances equal to the difference between the amount of credit loss allowances required under the incurred loss methodology and the amount of credit loss allowances required under CECL;
  • The proposed rule would provide an optional three-year phase-in of the “day-one” effects of CECL on regulatory capital;
  • A banking organization that elects the CECL transition provision must do so as of the CECL adoption date or forfeit the ability to make the election in future periods.

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