Optional delay provided in regulatory capital transition to credit losses standard

By Ken Tysiac

Federal bank regulators are providing an optional extension of the regulatory capital transition for FASB’s new credit losses standard in an attempt to make it easier for banking organizations to continue lending to households and businesses.

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly announced the issuance of an interim final rule that would allow banking organizations to mitigate the effects of FASB’s credit losses standard in their regulatory capital.

FASB issued its credit losses standard in 2016 in an effort to provide investors with more forward-looking information on expected loan losses and ensure that banks had enough capital in reserve to absorb those losses.

The federal regulators took action amid concerns related to the coronavirus pandemic’s effect on banks’ continued ability to provide loans to individuals and businesses. The new interim final rule states that banking organizations that are required to adopt FASB’s credit losses standard this year can mitigate the estimated cumulative regulatory capital effects for up to two years, in addition to the three-year transition period that already is in place.

Alternatively, banking organizations can follow the capital transition rule issued by the banking agencies in February 2019. The changes took effect immediately, and the agencies will accept comments on the interim final rule for 45 days.

The regulators’ action follows the inclusion of language in the new federal stimulus bill that would delay the date by which financial institutions are required to comply with FASB’s credit losses standard.

In addition, the bank regulators agreed to allow early adoption of a new methodology on how certain banking organizations are required to measure counterparty credit risk derivatives contracts. The “standardized approach for measuring counterparty credit risk” rule was finalized by the banking regulators in November with an effective date of April 1.

The agencies will permit banking organizations to early-adopt the rule for the reporting period ending March 31.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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