CECL’s ‘day one’ effects on credit union capital would be phased in over 3 years under proposed rule

A proposal that would phase in over three years the “day one” adverse effects on credit unions’ regulatory capital under the “current expected credit losses” (CECL) accounting standard, but which would exempt small credit unions from having to use the standard to figure loan loss reserves, was released for comment Thursday by the board of the federal regulator of credit unions.

During its open meeting, the National Credit Union Administration (NCUA) Board voted to propose phasing in the day-one effects on a federally insured credit unions’ (FICUs) net worth ratio over 12 quarters. This phase-in would apply to all FICUs that adopt the CECL methodology for fiscal years beginning on or after Dec. 15, 2022, without exception. Credit unions adopting the methodology earlier would not qualify for the phase-in.

Additionally, the board proposed that FICUs having less than $10 million in assets (1,291, or roughly one-fourth of all FICUs, based on March 31 call report data) would no longer be required to determine their charges for loan losses in accordance with generally accepted accounting principles (GAAP). They “may instead use any reasonable reserve methodology (incurred loss), provided that it adequately covers known and probable loan losses,” according to the proposed rule summary.

“The Board does note, however, that pursuant to section 202 [of the Federal Credit Union Act] state-chartered, federally insured credit unions subject to State laws and regulations may be required to comply with GAAP or other accounting standards under applicable State requirements,” the agency wrote.

NCUA stated in its proposal that FICUs would still be required to calculate their net worth in accordance with GAAP (as generally required under the statutorily required prompt corrective action [PCA]) system); and would continue to be required to account for CECL for all other purposes, such as call reports.

To monitor compliance with PCA, the NCUA said it will use the FICU’s net worth ratio as adjusted by the CECL transition provision. The agency said it will continue to examine credit loss estimates and allowance balances regardless of whether the FICU is subject to the CECL transition provision, and it may examine whether FICUs will have sufficient capital at the expiration of their CECL transition period.

The proposed rule, similar to a measure already adopted by banking regulators, will be out for public comment for 60 days following its publication in the Federal Register.

Notice of proposed rule for Federal Register

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