Federal Banking Agencies Issue Notice of Proposed Rulemaking Concerning Regulatory Capital Rules

The OCC, Board of Governors for the Federal Reserve, and the FDIC (Agencies), are inviting public comment to a proposed rule that addresses changes to the U.S. GAAP by amending their capital rules, including the Agencies’ rules governing banking organizations’ implementation of current expected credit losses methodology.

In June 2016, the Financial Accounting Standards Board revised the method by which banking institutions would account for credit losses under the U.S. GAAP.  The update includes a few new terms and methodologies, including introducing the current expected credit losses methodologies (CECL), which replaces the incurred loss methodology; introducing the term purchased credit-deteriorated (PCD) assets, which replaces the term purchased credit impaired assets; and modifying the treatment of credit losses on available-for-sale debt securities.

Responding to these changes, the Agencies determined an update to the capital rules was necessary to improve consistency between those rules and the updated principals in U.S. GAAP.  Specifically, they are amending the rules that identify which credit loss allowances under the new standards are eligible for inclusion in a bank organization’s regulatory capital.  One of the proposals is a newly defined term, “allowance for credit losses” (ACL), which would include credit loss allowances related to financial assets measured at amortized cost, except for allowances for PCD assets.

Additionally, the Agencies have proposed a CECL transition provision to aid banking organizations in their requirement to consider current and future expected economic conditions when calculating CECL.  To that end, the Agencies are proposing an option to phase in the potential adverse effects of CECL over a three-year period for banking organizations that experience a reduction in retained earnings as of the adoption date.  Importantly, a bank that does not elect to use this CECL transition period in the first quarter it reports losses under the CECL would not be permitted to make elections in subsequent reporting periods and would be required to reflect the full effect of the CECL immediately upon the adoption date.

The proposed rulemaking also addresses additional requirements for advanced approaches banking organizations by proposing to revise the definition of eligible credit reserves to align with the definition of ACL.  Finally, under the proposed rule, banking organizations subject the disclosure requirement would be required to update their disclosures to reflect the adoption of CECL.

The Comment period is open until July 13, 2018.