Federal Agencies Issue Final Rule to Mitigate CECL Effects

Three federal agencies on Friday announced actions to allow banking organizations to continue lending to households and businesses: providing an optional extension of the regulatory capital transition for the new credit loss accounting standard; and allowing early adoption of a new methodology on how certain banking organizations are required to measure counterparty credit risk derivatives contracts.

The interim CECL final rule and the new methodology were issued by the Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corp.; and the Office of the Comptroller of the Currency.

Of the two, the former is of particular interest to the real estate finance industry. The interim final rule (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200327a1.pdf) allows banking organizations to mitigate the effects of the “current expected credit loss,” or CECL, accounting standard in their regulatory capital.

Under the interim final rule, banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years; this is in addition to the three-year transition period already in place. Alternatively, banking organizations can follow the capital transition rule issued by the banking agencies in February 2019.

The interim final rule does not replace the current three-year transition option in the 2019 CECL rule, which remains available to any banking organization at the time that it adopts CECL. Banking organizations that have already adopted CECL have the option to elect the three-year transition option contained in the 2019 CECL rule or the five-year transition contained in the interim final rule, beginning with the March 31 Call Report or FR Y-9C.

“With the five-year transition option provided by the interim final rule, banking organizations have time to adapt capital planning under stress to the new standard, improving their flexibility and enhancing their ability to serve as a source of credit to the U.S. economy,” the agencies said.

The second action (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200327a2.pdf) allows for early adoption of a “standardized approach for measuring counterparty credit risk” rule, also known as SA-CCR, which was finalized by the agencies in November, with an effective date of April 1. It reflects improvements made to the derivatives market since the 2007-2008 financial crisis, such as central clearing and margin requirements. To help improve current market liquidity and smooth disruptions, the agencies will permit banking organizations to early adopt SA-CCR for the reporting period ending March 31.

The changes are effective immediately; the agencies will accept comments on the CECL interim final rule for 45 days.

CECLFederal Deposit Insurance Corp.Federal ReserveOffice of the Comptroller of the CurrencySA-CCR