Interim rule gives some banks breathing room on CECL, counterparty credit risk derivatives contracts

Mitigating effects of the current expected credit loss (CECL) accounting standard for up to two years in banks’ regulatory capital standard is the aim of an interim final rule issued Friday by the federal banking agencies.

The interim rule also contains a provision allowing early adoption (for the reporting period of March 31) of a new methodology on how some banking organizations are required to measure counterparty credit risk derivatives contracts.

The interim final rule takes effect immediately; however, the agencies will take comments for 45 days.

In a joint release, the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and Office of the Comptroller of the Currency (OCC) said that under the rule, banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years.

“This is in addition to the three-year transition period already in place,” the agencies pointed out. They added that, alternatively, “banking organizations can follow the capital transition rule issued by the banking agencies in February 2019.”

As for the portion of the rule that affects counterparty credit risk (CCR) derivatives contracts, the agencies noted it affects the “standardized approach for measuring counterparty credit risk” rule, also known as SA-CCR, which they finalized last November with an effective date of April 1. That rule, the agencies said, reflects improvements made to the derivatives market since the 2007-2008 financial crisis, such as central clearing and margin requirements.

“To help improve current market liquidity and smooth disruptions, the agencies will permit banking organizations to early adopt SA-CCR for the reporting period ending March 31,” the agencies said.

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