Regulators to phase in capital treatment of credit losses

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Federal regulators on Friday proposed a rule that would give banks three years to retain capital against credit losses in accordance with a new accounting policy.

The Fed said in a statement that the changes would give banks three years to assess their regulatory capital needs with respect to a new accounting policy issued by the Financial Accounting Standards Board in 2016, known as the Current Expected Credit Losses, or CECL.

“The proposal addresses the regulatory capital treatment of credit loss allowances under the CECL methodology and would allow banking organizations to phase in the day-one regulatory capital effects of CECL adoption over three years,” the Fed said. “The proposal would revise the board’s regulatory capital rules and other rules to take into consideration the new accounting standard.”

The Fed said that it would suspend the CECL elements of the U.S. generally accepted accounting principles — the industry standard accounting practices that FASB oversees — in its stress testing program until the 2020 stress testing cycle.

The agencies would also amend their capital rules to “identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital” and give banks the ability to phase in “day-one adverse effects on regulatory capital” that might arise from adopting the new standard.

The CECL rule requires banks and other financial institutions to assess potential credit losses when they put a new product on their books. Under the old standard, institutions were required to assess losses only when they thought that they may be likely. The change could require banks to raise additional capital against those potential losses. The rule is not slated to go into effect until 2020.

But banks have been slow to adopt the changes, with one survey finding that two-thirds of banks had not begun implementing the change, and a similar proportion expecting that the change would result in holding additional reserves.

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CECL Minimum capital requirements Federal Reserve OCC FDIC