Proposal would modify ratios to address changes in accounting standards for troubled debt restructurings

The underperforming assets ratio and higher-risk assets ratio — both used to determine deposit insurance assessments for large and highly complex banks – would be amended to include the new term of “modifications to borrowers experiencing financial difficulty” under a proposal issued late Wednesday by the federal insurer of bank deposits.

The proposal would effectively address the elimination of accounting guidance for troubled debt restructurings (TDRs) by the Financial Accounting Standards Board (FASB), the standards-setting body for the accounting profession.

According to a staff memo to the Federal Deposit Insurance Corp. (FDIC) Board, the proposal would expressly include the new accounting term, “modifications to borrowers experiencing financial difficulty,” recently introduced by the FASB designed to replace TDRs in the underperforming assets ratio and higher-risk assets ratio in the scorecards for large and highly complex banks.

The proposal would not affect the deposit insurance assessment system for small banks, the memo stated.

The memo stated that the primary expected effect of the proposal is the change in underperforming assets, and the change in assessment rates, that would happen a s a result of the difference between the amount of TDRs that most banks now report and the amount of modifications to borrowers experiencing financial difficulty that banks will report upon adoption of the new FASB standard (Accounting Standards Update [ASU] 2022-02).

“The effect of this proposed rule on assessments paid by large and highly complex banks is difficult to estimate since most banks are not yet reporting modifications to borrowers experiencing financial difficulty, and staff do not know how the amount of reported modifications to borrowers experiencing financial difficulty will compare to the amount of TDRs that affected banks report,” the memo states.

However, the memo noted that FDIC staff, in general, expect that the initial amount of modifications made to borrowers experiencing financial difficulty will be lower than previously reported TDRs. “This is because under ASU 2022-02, reporting of modifications to borrowers experiencing financial difficulty should be applied prospectively and would therefore apply only to modifications made after a bank adopts the standard,” the memo stated.

“However, in the long term it is possible that the amount of modifications to borrowers experiencing financial difficulty could be higher or lower than the amount of TDRs that banks would have reported prior to adoption of ASU 2022-02. Therefore, under the proposed rule, the underperforming assets ratio could be higher or lower due to the adoption of ASU 2022-02, and the resulting ratio may or may not affect an individual bank’s assessment rate, depending on whether it is the binding ratio for the credit quality measure,” the memo adds.

FDIC memo: Assessments, Amendments to Incorporate Troubled Debt Restructuring Accounting Standards Update

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