Federal banking examiners will use tier 1 capital plus the appropriate allowance for loan and lease losses or the allowance for credit losses attributed to loans and leases (as applicable) for the denominator when calculating credit concentration ratios, beginning Tuesday, the banking agencies said.
In a joint release Monday, the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve and the Office of the Comptroller of the Currency (OCC) said adjusting the calculations for credit concentration is in response to changes in the capital information available after the implementation of the Community Bank Leverage Ratio (CBLR). The ratio took effect Jan. 1; call reports for the first quarter (which ends Tuesday) will be the first to include the new ratio.
In a financial institution letter (FIL-31-2020), the FDIC noted that, at the end of the first quarter (March 31), qualifying community banking organizations that elect the CBLR framework are not required to report tier 2 capital, which historically has been a part of the denominator used in calculating credit concentration ratios for supervisory processes.
The FDIC letter pointed out that the adjustments mean examiners will calculate ratios measuring credit concentrations using:
- Tier 1 capital plus the entire allowance for loan and lease losses as the denominator or;
- Tier 1 capital plus the portion of the allowance for credit losses attributable to loans and leases as the denominator for banking organizations that have adopted the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification Topic 326, Financial Instruments—Credit Losses that implements the current expected credit losses (CECL) methodology.
The FDIC letter stated that the examiners’ approaches are expected to provide a consistent methodology for calculating the ratios at all insured depository institutions; and approximate the agencies’ historical methodology for calculating credit concentration ratios.