Federal Banking Agencies Permit Longer Phase-in of CECL Methodology

The OCC, FRB, and FDIC have issued an interim final rule to provide transitional relief to banking organizations required to implement the current expected credit losses (CECL) methodology for a fiscal year beginning in 2020.  The interim final rule became effective when it was published in the Federal Register on March 31, 2020, but the Agencies will accept comments if received by May 15, 2020.

In early 2019, the Agencies issued a final rule to incorporate the Financial Accounting Standards Board’s changes to credit loss accounting under U.S. GAAP.  Among other changes, the 2019 final rule replaced the incurred loss methodology with the CECL methodology.  The rule also included a transition option to allow banking organizations to phase in the adverse effects of CECL over a three-year period.

In the interim final rule, the Agencies explained that they provided an alternative option to temporarily delay CECL’s impact on regulatory capital to allow banking organizations to focus on lending due to recent strains on the U.S. economy resulting from the COVID-19 pandemic.

The interim final rule provides banking organizations required to adopt CECL for a fiscal year beginning in 2020 with an option to delay the estimated impact of CECL on regulatory capital for two years.  The two-year delay is followed by a three-year transition period to “phase out the aggregate amount of the capital benefit provided during the initial two-year delay.”  The interim final rule allows banking organizations that have already adopted CECL the option to elect the three-year transition period in the 2019 final rule, or the five-year transition period in the interim final rule.

The interim final rule provides electing banking organizations with a methodology for delaying the effect on regulatory capital for credit losses attributed to CECL as compared to the incurred loss methodology.