Provisions for federal financial institution regulation in CARES beginning to seep out

A requirement for open meetings by the Federal Reserve would be waived, and the capital leverage ratio for community banks would drop to 8%, under some of the provisions being considered by the Senate to address the coronavirus crisis, according to reports Tuesday.

According to a report by American Action Forum – a Washington-based think-tank that describes itself as a center-right leaning group focusing on economic, domestic, and fiscal policy issues – a smattering of provisions related to federal financial regulation have been included in the latest version of the Coronavirus Aid, Relief and Economic Security Act (CARES Act, S.3548). The legislation is ultimately expected to cost at least $2 trillion.

The vast majority of the costs are related to financial considerations for consumers and businesses affected by the coronavirus crisis. The provisions affecting federal financial institution regulation are less significant from a cost standpoint, but they may be just as substantial in their effect.

For example, according to a report, one section of the legislation (as it stood as of Tuesday afternoon) would waive the requirement that the Federal Reserve (and, presumably, its board) conduct open meetings.

Another provision, according to reports, would set the community bank leverage ratio (CBLR) at 8% – down from the current 9% agreed upon by the federal banking agencies last fall. That change to the lower ratio has been sought since last year by the banking industry, when regulators set the CBLR at 9%. Under the 2018 regulatory relief legislation (the Economic Growth, Regulatory Relief, and Consumer Protection Act [EGRRCPA, S.2155]), the banking agencies were given the option to set the CBLR from 10% to 8%. The banking industry supported 8%.

Under the final rule setting the CBLR, a community bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9%. A bank meeting that criteria is allowed to adopt a simple leverage ratio to measure capital adequacy. The qualifying banks also would not be required to calculate and report risk-based capital.

A third key provision in the Senate CARES Act for financial institutions would delay compliance with the current expected credit loss (CECL) accounting standard. (The standard replaces the allowance for loan and lease losses, or ALLL, and focuses on estimation of expected losses over the life of loans rather than incurred losses.)

Reportedly, under the provision, compliance with the CECL standard would be required after Dec. 31, 2020, or the end of the “national emergency” declared under the legislation – whichever comes first.

The CECL compliance date for smaller financial institutions had already been extended to 2023 under earlier action by the Financial Accounting Standards Board (FASB). No details are available, so far, on any additional extensions under the CARES Act for those institutions.

Last week, Federal Deposit Insurance Corp. (FDIC) Chairman Jelena McWilliams wrote to the FASB urging it to allow banks that are now subject to CECL to have the option to postpone further implementation of the accounting standard. She wrote  that postponing further implementation “will allow these institutions to better focus on supporting lending to creditworthy households and businesses, which will support the return of our economy to health.”

American Action Forum: Financial services provisions in the CARES Act (updated)

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