Agencies Propose Transition of New CECL Accounting Standard into Regulatory Capital Framework

Industry Updates  ยป  Agencies Propose Transition of New CECL Accounting Standard into Regulatory Capital Framework

The deadlines for implementation of the new Current Expected Credit Losses (CECL) are fast approaching. 

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation are inviting public comment on a joint proposal to address changes to U.S. generally accepted accounting principles (U.S. GAAP), including banking organizations’ implementation of the current expected credit losses methodology.

Specifically, the proposal would revise the agencies’ regulatory capital rules to identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

The proposal also would amend certain regulatory disclosure requirements to reflect applicable changes to U.S. GAAP covered under ASU 2016-13. In addition, the agencies are proposing to make amendments to their stress testing regulations so that covered banking organizations that have adopted ASU 2016-13 would not include the effect of ASU 2016-13 on their provisioning for purposes of stress testing until the 2020 stress test cycle.

Finally, the agencies are proposing to make conforming amendments to their other regulations that reference credit loss allowances.

The Proposed Rule would:

  • Add allowance for credit losses (ACL), as a newly defined term in the capital rules, for banking organizations upon their adoption of CECL. ACL identifies those credit loss allowances that may be included in tier 2 capital up to the current limit. The agencies are defining ACL to be generally consistent with the scope of credit loss allowances on assets and other exposures covered under CECL. For example, the definition of ACL includes allowances for held-to-maturity debt securities.
  • Revise the definition of carrying value to maintain the current treatment of credit losses on available-for-sale (AFS) debt securities. For credit losses on an AFS debt security, ASU 2016-13 requires a credit loss allowance rather than a direct write-down. Under the proposed rule, a banking organization would risk weight the carrying value of an AFS debt security, which has been reduced by any associated credit loss allowance.
  • Provide an optional three-year transition arrangement that allows institutions to phase in any adverse day-one regulatory capital effects of CECL adoption on retained earnings, deferred tax assets, ACL, and average total consolidated assets.
  • Amend the definition of eligible credit reserves consistent with the changes to the definition of ACL for banking organizations subject to the advanced approaches.
  • Revise disclosure requirements for certain banking organizations.

The agencies are planning on holding a National Banker call in May of this year, and details for this will follow.

The FDIC has produced a summary for community banks that explains the proposed simplifications to the new capital rule. This document can be accessed here: https://www.fdic.gov/regulations/capital/capital/community-bank-summary-20170927.pdf.


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