FDIC adopts final rule allowing optional ‘phase-in’ of CECL for regulatory capital

A final rule allowing a three-year phase-in of new accounting rules to ease the impact for banks on regulatory capital requirements was approved by the Federal Deposit Insurance Corp. (FDIC) Board Tuesday.

The final rule is effective on April 1, 2019, but banking organizations may “early adopt” before then, the FDIC said. The action on the final rule, addressing the current expected credit loss (CECL) accounting standard, was one of several taken by the board at its meeting in Washington, D.C.

Under the rule, banks will have the option to phase in over a three-year period the day-one adverse effects of the CECL standard on regulatory capital. The accounting standard, adopted by the Financial Accounting Standards Board (FASB) in 2016, governs for accounting purposes the recognition and measurement of credit losses for loans and debt securities. It requires an estimate of expected credit losses over the life of the portfolio to be effectively recorded upon origination.

The standard takes effect in 2020 for SEC registrants, 2021 for non-SEC banks (FASB-defined as “public business entities”) and 2022 for all other banks and credit unions (as “non-PBEs,” that is, for fiscal years starting after Dec. 15, 2021).

The final rule requires that the 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.

In addition, according to the FDIC, the final rule revises the agencies’ regulatory capital rule, stress testing rules, and regulatory disclosure requirements to reflect CECL; and it makes conforming amendments to other regulations that reference credit loss allowances.

The Federal Reserve and Office of the Comptroller of the Currency (OCC) are also adopting the final rule, the FDIC noted.

Final Rule: Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations

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