Banking Agencies Propose Amending Capital Rules To Include New Accounting Standard

The Office of the Comptroller of the Currency, the FDIC and the Board of Governors of the Federal Reserve System (collectively, the "agencies") proposed amending bank capital rules to incorporate revised financial accounting standards for credit losses. In June 2016, the Financial Accounting Standards Board issued the new accounting standards. The agencies' proposal will ease the adjustment process for banking organizations that adopt the new accounting standards.

Among other changes, under the new accounting standards, the proposal would allow banking organizations to add allowance for credit losses ("ACL") when they adopt the credit losses methodology ("CECL"). After implementing CECL, banking organizations would be allowed an optional three-year transition arrangement to phase in the regulatory capital effects. The proposal (i) incorporates regulatory disclosure requirements and stress testing regulation changes under ASU 2016-13, and (ii) extends the ACL amendments to other agency regulations.

The agencies are requesting comments on:

• the use of the term ACL for banking organizations under capital rules in relation to the other uses of the term (including in U.S. GAAP and accounting guidance);
• application of ACL for determining the amount of allowances and the appropriateness of the approach to available-for-sale debt securities and purchased credit-deteriorated assets;
• alternative approaches to implementing the day-one effects of CECL on banking organizations' regulatory capital ratios;
• the proposed length of the CECL transition period;
• the implementation of business combinations and alternative approaches to treating business combinations under the CECL transition provision;
• the use of the definition of eligible credit reserves for determining the amount of allowance in the total capital of an advanced approaches banking organization;
• proposed CECL transitional amount limitation for advanced approaches banking organizations that have an eligible credit reserves shortfall;
• the requirement to exclude banking organizations that adopt CECL in 2019 from having to include provisions for credit losses in the 2019 stress test cycle; and
• any additional changes to the stress testing rules for the new accounting standard.

Comments must be received within 60 days of publication of the notice in the Federal Register.

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