A final rule providing the option for financial institutions and firms to phase in over a three-year period the day-one regulatory capital effects of the “current expected credit losses” (CECL) accounting methodology is finally scheduled to be published Thursday – although its effective date remains April 1.
The publication of the rule was delayed by the 35-day, partial government shutdown that ended last month.
The final rule – finalized Dec. 21 by the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) – also revises those agencies’ other regulations to reflect the update to the accounting standards. In addition, even though the effective date is April 1, the agencies have indicated that banking organizations may “early adopt” the rules’ provisions before then.
Under the rule, banks will have the option to phase in over a three-year period the day-one adverse effects of the CECL standard on regulatory capital.
The final rule requires that the phase-in option would have to be elected in the quarter that the institution first reports its credit loss allowances as measured under CECL. If the election isn’t made then, it would no longer be available, and the bank would be required to reflect the full effect of CECL in its regulatory capital ratios as of the banking organization’s CECL adoption date.
In addition, according to the agencies, the final rule revises the agencies’ regulatory capital rule, stress testing rules, and regulatory disclosure requirements to reflect CECL; and it makes conforming amendments to other regulations that reference credit loss allowances.
The CECL accounting standard, adopted by the Financial Accounting Standards Board (FASB) in 2016, governs for accounting purposes the recognition and measurement of credit losses for loans and debt securities. It requires an estimate of expected credit losses over the life of the portfolio to be effectively recorded upon origination.
The standard takes effect in 2020 for Securities and Exchange Commission (SEC) registrants, 2021 for non-SEC banks (FASB-defined as “public business entities”), and 2022 for all other banks and credit unions (as “non-PBEs,” that is, for fiscal years starting after Dec. 15, 2021).