This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
Proposed Rules Federal Register
78794
Vol. 85, No. 235
Monday, December 7, 2020
1 12 U.S.C. 1817(b).
2 57 FR 45263 (Oct. 1, 1992).
3 As used in this proposed rule, the term ‘‘insured
depository institution’’ has the same meaning as it
is used in section 3(c)(2) of the FDI Act, 12 U.S.C.
1813(c)(2).
4 See 71 FR 69282 (Nov. 30, 2006). Generally,
large IDIs have $10 billion or more in total assets
and small IDIs have less than $10 billion in total
assets. See 12 CFR 327.8(e) and (f). As used in this
proposed rule, the term ‘‘small bank’’ is
synonymous with ‘‘small institution,’’ the term
‘‘large bank’’ is synonymous with ‘‘large
institution,’’ and the term ‘‘highly complex bank’’
is synonymous with ‘‘highly complex institution,’’
as the terms are defined in 12 CFR 327.8.
5 See 76 FR 10672 (Feb. 25, 2011).
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 327
RIN 3064–AF65
Assessments, Amendments To
Address the Temporary Deposit
Insurance Assessment Effects of the
Optional Regulatory Capital
Transitions for Implementing the
Current Expected Credit Losses
Methodology
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
SUMMARY: The Federal Deposit
Insurance Corporation is seeking
comment on a proposed rule that would
amend the risk-based deposit insurance
assessment system applicable to all
large insured depository institutions
(IDIs), including highly complex IDIs, to
address the temporary deposit insurance
assessment effects resulting from certain
optional regulatory capital transition
provisions relating to the
implementation of the current expected
credit losses (CECL) methodology. The
proposal would amend the assessment
regulations to remove the double
counting of a specified portion of the
CECL transitional amount or the
modified CECL transition amount, as
applicable (collectively, the CECL
transitional amounts), in certain
financial measures that are calculated
using the sum of Tier 1 capital and
reserves and that are used to determine
assessment rates for large and highly
complex IDIs. The proposal also would
adjust the calculation of the loss
severity measure to remove the double
counting of a specified portion of the
CECL transitional amounts for a large or
highly complex IDI. This proposal
would not affect regulatory capital or
the regulatory capital relief provided in
the form of transition provisions that
allow banking organizations to phase in
the effects of CECL on their regulatory
capital ratios.
DATES: Comments must be received no
later than January 6, 2021.
ADDRESSES: You may submit comments
on the proposed rule using any of the
following methods:
• Agency Website: https://
www.fdic.gov/regulations/laws/federal.
Follow the instructions for submitting
comments on the agency website.
• Email: comments@fdic.gov. Include
RIN 3064–AF65 on the subject line of
the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
• Hand Delivery: Comments may be
hand delivered to the guard station at
the rear of the 550 17th Street building
(located on F Street) on business days
between 7 a.m. and 5 p.m.
• Public Inspection: All comments
received, including any personal
information provided, will be posted
generally without change to https://
www.fdic.gov/regulations/laws/federal.
FOR FURTHER INFORMATION CONTACT:
Scott Ciardi, Chief, Large Bank Pricing,
(202) 898–7079 or sciardi@fdic.gov;
Ashley Mihalik, Chief, Banking and
Regulatory Policy, (202) 898–3793 or
amihalik@fdic.gov; Nefretete Smith,
Counsel, (202) 898–6851 or nefsmith@
fdic.gov; Sydney Mayer, Senior
Attorney, (202) 898–3669 or smayer@
fdic.gov.
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
The Federal Deposit Insurance Act
(FDI Act) requires that the FDIC
establish a risk-based deposit insurance
assessment system.1 Pursuant to this
requirement, the FDIC first adopted a
risk-based deposit insurance assessment
system effective in 1993 that applied to
all IDIs.2 The FDIC implemented this
assessment system with the goals of
making the deposit insurance system
fairer to well-run institutions and
encouraging weaker institutions to
improve their condition, and thus,
promote the safety and soundness of
IDIs.3
In 2006, the FDIC adopted a final rule
that created different risk-based
assessment systems for large and small
IDIs that combined supervisory ratings
with other risk measures to differentiate
risk and determine assessment rates.4 In
2011, the FDIC amended the risk-based
assessment system applicable to large
IDIs to, among other things, better
capture risk at the time the institution
assumes the risk, to better differentiate
risk among large IDIs during periods of
good economic and banking conditions
based on how they would fare during
periods of stress or economic
downturns, and to better take into
account the losses that the FDIC may
incur if a large IDI fails.5
The FDIC is required by statute to set
deposit insurance assessments based on
risk, and the FDIC’s objective in setting
forth this proposal is to ensure that
banks are assessed in a manner that is
fair and accurate. The primary objective
of this proposal is to remove a double
counting issue in several financial
measures used to determine deposit
insurance assessments for large and
highly complex banks, which could
result in a deposit insurance assessment
rate for a large or highly complex bank
that does not accurately reflect the
bank’s risk to the deposit insurance
fund (DIF), all else equal. Specifically,
the proposal would amend the
assessment regulations to remove the
double counting of a portion of the
CECL transitional amounts, in certain
financial measures used to determine
deposit insurance assessments for large
and highly complex banks. In particular,
certain financial measures are
calculated by summing Tier 1 capital,
which includes the CECL transitional
amounts, and reserves, which already
reflects the implementation of CECL. As
a result, a portion of the CECL
transitional amounts is being double
counted in these measures, which in
turn affects assessment rates for large
and highly complex banks. The
proposal also would adjust the
calculation of the loss severity measure
to remove the double counting of a
VerDate Sep<11>2014 17:11 Dec 04, 2020 Jkt 253001 PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 E:\FR\FM\07DEP1.SGM 07DEP1
khammond on DSKJM1Z7X2PROD with PROPOSALS
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
Proposed Rules Federal Register
78794
Vol. 85, No. 235
Monday, December 7, 2020
1 12 U.S.C. 1817(b).
2 57 FR 45263 (Oct. 1, 1992).
3 As used in this proposed rule, the term ‘‘insured
depository institution’’ has the same meaning as it
is used in section 3(c)(2) of the FDI Act, 12 U.S.C.
1813(c)(2).
4 See 71 FR 69282 (Nov. 30, 2006). Generally,
large IDIs have $10 billion or more in total assets
and small IDIs have less than $10 billion in total
assets. See 12 CFR 327.8(e) and (f). As used in this
proposed rule, the term ‘‘small bank’’ is
synonymous with ‘‘small institution,’’ the term
‘‘large bank’’ is synonymous with ‘‘large
institution,’’ and the term ‘‘highly complex bank’’
is synonymous with ‘‘highly complex institution,’’
as the terms are defined in 12 CFR 327.8.
5 See 76 FR 10672 (Feb. 25, 2011).
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 327
RIN 3064–AF65
Assessments, Amendments To
Address the Temporary Deposit
Insurance Assessment Effects of the
Optional Regulatory Capital
Transitions for Implementing the
Current Expected Credit Losses
Methodology
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
SUMMARY: The Federal Deposit
Insurance Corporation is seeking
comment on a proposed rule that would
amend the risk-based deposit insurance
assessment system applicable to all
large insured depository institutions
(IDIs), including highly complex IDIs, to
address the temporary deposit insurance
assessment effects resulting from certain
optional regulatory capital transition
provisions relating to the
implementation of the current expected
credit losses (CECL) methodology. The
proposal would amend the assessment
regulations to remove the double
counting of a specified portion of the
CECL transitional amount or the
modified CECL transition amount, as
applicable (collectively, the CECL
transitional amounts), in certain
financial measures that are calculated
using the sum of Tier 1 capital and
reserves and that are used to determine
assessment rates for large and highly
complex IDIs. The proposal also would
adjust the calculation of the loss
severity measure to remove the double
counting of a specified portion of the
CECL transitional amounts for a large or
highly complex IDI. This proposal
would not affect regulatory capital or
the regulatory capital relief provided in
the form of transition provisions that
allow banking organizations to phase in
the effects of CECL on their regulatory
capital ratios.
DATES: Comments must be received no
later than January 6, 2021.
ADDRESSES: You may submit comments
on the proposed rule using any of the
following methods:
• Agency Website: https://
www.fdic.gov/regulations/laws/federal.
Follow the instructions for submitting
comments on the agency website.
• Email: comments@fdic.gov. Include
RIN 3064–AF65 on the subject line of
the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
• Hand Delivery: Comments may be
hand delivered to the guard station at
the rear of the 550 17th Street building
(located on F Street) on business days
between 7 a.m. and 5 p.m.
• Public Inspection: All comments
received, including any personal
information provided, will be posted
generally without change to https://
www.fdic.gov/regulations/laws/federal.
FOR FURTHER INFORMATION CONTACT:
Scott Ciardi, Chief, Large Bank Pricing,
(202) 898–7079 or sciardi@fdic.gov;
Ashley Mihalik, Chief, Banking and
Regulatory Policy, (202) 898–3793 or
amihalik@fdic.gov; Nefretete Smith,
Counsel, (202) 898–6851 or nefsmith@
fdic.gov; Sydney Mayer, Senior
Attorney, (202) 898–3669 or smayer@
fdic.gov.
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
The Federal Deposit Insurance Act
(FDI Act) requires that the FDIC
establish a risk-based deposit insurance
assessment system.1 Pursuant to this
requirement, the FDIC first adopted a
risk-based deposit insurance assessment
system effective in 1993 that applied to
all IDIs.2 The FDIC implemented this
assessment system with the goals of
making the deposit insurance system
fairer to well-run institutions and
encouraging weaker institutions to
improve their condition, and thus,
promote the safety and soundness of
IDIs.3
In 2006, the FDIC adopted a final rule
that created different risk-based
assessment systems for large and small
IDIs that combined supervisory ratings
with other risk measures to differentiate
risk and determine assessment rates.4 In
2011, the FDIC amended the risk-based
assessment system applicable to large
IDIs to, among other things, better
capture risk at the time the institution
assumes the risk, to better differentiate
risk among large IDIs during periods of
good economic and banking conditions
based on how they would fare during
periods of stress or economic
downturns, and to better take into
account the losses that the FDIC may
incur if a large IDI fails.5
The FDIC is required by statute to set
deposit insurance assessments based on
risk, and the FDIC’s objective in setting
forth this proposal is to ensure that
banks are assessed in a manner that is
fair and accurate. The primary objective
of this proposal is to remove a double
counting issue in several financial
measures used to determine deposit
insurance assessments for large and
highly complex banks, which could
result in a deposit insurance assessment
rate for a large or highly complex bank
that does not accurately reflect the
bank’s risk to the deposit insurance
fund (DIF), all else equal. Specifically,
the proposal would amend the
assessment regulations to remove the
double counting of a portion of the
CECL transitional amounts, in certain
financial measures used to determine
deposit insurance assessments for large
and highly complex banks. In particular,
certain financial measures are
calculated by summing Tier 1 capital,
which includes the CECL transitional
amounts, and reserves, which already
reflects the implementation of CECL. As
a result, a portion of the CECL
transitional amounts is being double
counted in these measures, which in
turn affects assessment rates for large
and highly complex banks. The
proposal also would adjust the
calculation of the loss severity measure
to remove the double counting of a
VerDate Sep<11>2014 17:11 Dec 04, 2020 Jkt 253001 PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 E:\FR\FM\07DEP1.SGM 07DEP1
khammond on DSKJM1Z7X2PROD with PROPOSALS
78795Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Proposed Rules
6 Banking organizations subject to the capital rule
include national banks, state member banks, state
nonmember banks, savings associations, and top-
tier bank holding companies and savings and loan
holding companies domiciled in the United States
not subject to the Federal Reserve Board’s Small
Bank Holding Company Policy Statement (12 CFR
part 225, appendix C), but exclude certain savings
and loan holding companies that are substantially
engaged in insurance underwriting or commercial
activities or that are estate trusts, and bank holding
companies and savings and loan holding companies
that are employee stock ownership plans. See 12
CFR part 3 (Office of the Comptroller of the
Currency)); 12 CFR part 217 (Board); 12 CFR part
324 (FDIC). See also 84 FR 4222 (February 14, 2019)
and 85 FR 61577 (September 30, 2020).
7 See 84 FR 4225 (February 14, 2019).
8 See 12 CFR 327.3(b)(1).
9 See 12 CFR 327.5.
10 For assessment purposes, a large bank is
generally defined as an institution with $10 billion
or more in total assets, a small bank is generally
defined as an institution with less than $10 billion
in total assets, and a highly complex bank is
generally defined as an institution that has $50
billion or more in total assets and is controlled by
a parent holding company that has $500 billion or
more in total assets, or is a processing bank or trust
company. See 12 CFR 327.16(a) and (b).
11 See 12 CFR 327.16(b); see also 76 FR 10672
(Feb. 25, 2011) and 77 FR 66000 (Oct. 31, 2012).
12 See 76 FR 10688. The FDIC uses a different
scorecard for highly complex IDIs because those
institutions are structurally and operationally
complex, or pose unique challenges and risks in
case of failure. 76 FR 10695.
13 ASU 2016–13 covers measurement of credit
losses on financial instruments and includes three
subtopics within Topic 326: (i) Subtopic 326–10
Financial Instruments—Credit Losses—Overall; (ii)
Subtopic 326–20: Financial Instruments—Credit
Losses—Measured at Amortized Cost; and (iii)
Subtopic 326–30: Financial Instruments—Credit
Losses—Available-for-Sale Debt Securities.
14 ‘‘Other extensions of credit’’ includes trade and
reinsurance receivables, and receivables that relate
to repurchase agreements and securities lending
agreements. ‘‘Off-balance sheet credit exposures’’
includes off-balance sheet credit exposures not
accounted for as insurance, such as loan
commitments, standby letters of credit, and
financial guarantees. The FDIC notes that credit
losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not
recognized under CECL.
portion of the CECL transitional
amounts for a large or highly complex
bank.
This proposal would amend the
deposit insurance system applicable to
large and highly complex banks only,
and it would not affect regulatory
capital or the regulatory capital relief
provided in the form of transition
provisions that allow banking
organizations to phase in the effects of
CECL on their regulatory capital ratios.6
Specifically, in calculating another
measure used to determine assessment
rates for all IDIs, the Tier 1 leverage
ratio, the FDIC would continue to apply
the CECL regulatory capital transition
provisions, consistent with the
regulatory capital relief provided to
address concerns that despite adequate
capital planning, unexpected economic
conditions at the time of CECL adoption
could result in higher-than-anticipated
increases in allowances.7
The proposed amendments to the
deposit insurance assessment system
and any changes to reporting
requirements pursuant to this proposal
would be required only while the
regulatory capital relief described above
is reflected in the regulatory reports of
banks.
II. Background
A. Deposit Insurance Assessments
The FDIC charges all IDIs an
assessment amount for deposit
insurance equal to the IDI’s deposit
insurance assessment base multiplied
by its risk-based assessment rate.8 An
IDI’s assessment base and assessment
rate are determined each quarter based
on supervisory ratings and information
collected in the Consolidated Reports of
Condition and Income (Call Report) or
the Report of Assets and Liabilities of
U.S. Branches and Agencies of Foreign
Banks (FFIEC 002), as appropriate.
Generally, an IDI’s assessment base
equals its average consolidated total
assets minus its average tangible
equity.9
An IDI’s assessment rate is calculated
using different methods based on
whether the IDI is a small, large, or
highly complex bank.10 Large and
highly complex banks are assessed
using a scorecard approach that
combines CAMELS ratings and certain
forward-looking financial measures to
assess the risk that a large or highly
complex bank poses to the DIF.11 The
score that each large or highly complex
bank receives is used to determine its
deposit insurance assessment rate. One
scorecard applies to most large IDIs and
another applies to highly complex
banks. Both scorecards use quantitative
financial measures that are useful in
predicting a large or highly complex
bank’s long-term performance.12
As described in more detail below,
the FDIC is proposing to amend the
assessment regulations to remove the
double counting of a portion of the
CECL transitional amounts in the
calculation of the loss severity measure
and certain other financial measures
that are calculated by summing Tier 1
capital and reserves, which are used to
determine assessment rates for large and
highly complex banks.
B. The Current Expected Credit Losses
Methodology
In 2016, the Financial Accounting
Standards Board (FASB) issued
Accounting Standards Update (ASU)
No. 2016–13, Financial Instruments—
Credit Losses, Topic 326, Measurement
of Credit Losses on Financial
Instruments.13 The ASU resulted in
significant changes to credit loss
accounting under U.S. generally
accepted accounting principles (GAAP).
The revisions to credit loss accounting
under GAAP included the introduction
of CECL, which replaces the incurred
loss methodology for financial assets
measured at amortized cost. For these
assets, CECL requires banking
organizations to recognize lifetime
expected credit losses and to
incorporate reasonable and supportable
forecasts in developing the estimate of
lifetime expected credit losses, while
also maintaining the current
requirement that banking organizations
consider past events and current
conditions.
CECL allowances cover a broader
range of financial assets than the
allowance for loan and lease losses
(ALLL) under the incurred loss
methodology. Under the incurred loss
methodology, the ALLL generally covers
credit losses on loans held for
investment and lease financing
receivables, with additional allowances
for certain other extensions of credit and
allowances for credit losses on certain
off-balance sheet credit exposures (with
the latter allowances presented as
liabilities).14 These exposures will be
within the scope of CECL. In addition,
CECL applies to credit losses on held-
to-maturity (HTM) debt securities. ASU
2016–13 also introduces new
requirements for available-for-sale (AFS)
debt securities. The new accounting
standard requires that a banking
organization recognize credit losses on
individual AFS debt securities through
credit loss allowances, rather than
through direct write-downs, as is
currently required under U.S. GAAP.
The credit loss allowances attributable
to debt securities are separate from the
credit loss allowances attributable to
loans and leases.
C. The 2019 CECL Rule
Upon adoption of CECL, a banking
organization will record a one-time
adjustment to its credit loss allowances
as of the beginning of its fiscal year of
adoption equal to the difference, if any,
between the amount of credit loss
allowances required under the incurred
loss methodology and the amount of
credit loss allowances required under
CECL. A banking organization’s
implementation of CECL will affect its
retained earnings, deferred tax assets
VerDate Sep<11>2014 17:11 Dec 04, 2020 Jkt 253001 PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 E:\FR\FM\07DEP1.SGM 07DEP1
khammond on DSKJM1Z7X2PROD with PROPOSALS
6 Banking organizations subject to the capital rule
include national banks, state member banks, state
nonmember banks, savings associations, and top-
tier bank holding companies and savings and loan
holding companies domiciled in the United States
not subject to the Federal Reserve Board’s Small
Bank Holding Company Policy Statement (12 CFR
part 225, appendix C), but exclude certain savings
and loan holding companies that are substantially
engaged in insurance underwriting or commercial
activities or that are estate trusts, and bank holding
companies and savings and loan holding companies
that are employee stock ownership plans. See 12
CFR part 3 (Office of the Comptroller of the
Currency)); 12 CFR part 217 (Board); 12 CFR part
324 (FDIC). See also 84 FR 4222 (February 14, 2019)
and 85 FR 61577 (September 30, 2020).
7 See 84 FR 4225 (February 14, 2019).
8 See 12 CFR 327.3(b)(1).
9 See 12 CFR 327.5.
10 For assessment purposes, a large bank is
generally defined as an institution with $10 billion
or more in total assets, a small bank is generally
defined as an institution with less than $10 billion
in total assets, and a highly complex bank is
generally defined as an institution that has $50
billion or more in total assets and is controlled by
a parent holding company that has $500 billion or
more in total assets, or is a processing bank or trust
company. See 12 CFR 327.16(a) and (b).
11 See 12 CFR 327.16(b); see also 76 FR 10672
(Feb. 25, 2011) and 77 FR 66000 (Oct. 31, 2012).
12 See 76 FR 10688. The FDIC uses a different
scorecard for highly complex IDIs because those
institutions are structurally and operationally
complex, or pose unique challenges and risks in
case of failure. 76 FR 10695.
13 ASU 2016–13 covers measurement of credit
losses on financial instruments and includes three
subtopics within Topic 326: (i) Subtopic 326–10
Financial Instruments—Credit Losses—Overall; (ii)
Subtopic 326–20: Financial Instruments—Credit
Losses—Measured at Amortized Cost; and (iii)
Subtopic 326–30: Financial Instruments—Credit
Losses—Available-for-Sale Debt Securities.
14 ‘‘Other extensions of credit’’ includes trade and
reinsurance receivables, and receivables that relate
to repurchase agreements and securities lending
agreements. ‘‘Off-balance sheet credit exposures’’
includes off-balance sheet credit exposures not
accounted for as insurance, such as loan
commitments, standby letters of credit, and
financial guarantees. The FDIC notes that credit
losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not
recognized under CECL.
portion of the CECL transitional
amounts for a large or highly complex
bank.
This proposal would amend the
deposit insurance system applicable to
large and highly complex banks only,
and it would not affect regulatory
capital or the regulatory capital relief
provided in the form of transition
provisions that allow banking
organizations to phase in the effects of
CECL on their regulatory capital ratios.6
Specifically, in calculating another
measure used to determine assessment
rates for all IDIs, the Tier 1 leverage
ratio, the FDIC would continue to apply
the CECL regulatory capital transition
provisions, consistent with the
regulatory capital relief provided to
address concerns that despite adequate
capital planning, unexpected economic
conditions at the time of CECL adoption
could result in higher-than-anticipated
increases in allowances.7
The proposed amendments to the
deposit insurance assessment system
and any changes to reporting
requirements pursuant to this proposal
would be required only while the
regulatory capital relief described above
is reflected in the regulatory reports of
banks.
II. Background
A. Deposit Insurance Assessments
The FDIC charges all IDIs an
assessment amount for deposit
insurance equal to the IDI’s deposit
insurance assessment base multiplied
by its risk-based assessment rate.8 An
IDI’s assessment base and assessment
rate are determined each quarter based
on supervisory ratings and information
collected in the Consolidated Reports of
Condition and Income (Call Report) or
the Report of Assets and Liabilities of
U.S. Branches and Agencies of Foreign
Banks (FFIEC 002), as appropriate.
Generally, an IDI’s assessment base
equals its average consolidated total
assets minus its average tangible
equity.9
An IDI’s assessment rate is calculated
using different methods based on
whether the IDI is a small, large, or
highly complex bank.10 Large and
highly complex banks are assessed
using a scorecard approach that
combines CAMELS ratings and certain
forward-looking financial measures to
assess the risk that a large or highly
complex bank poses to the DIF.11 The
score that each large or highly complex
bank receives is used to determine its
deposit insurance assessment rate. One
scorecard applies to most large IDIs and
another applies to highly complex
banks. Both scorecards use quantitative
financial measures that are useful in
predicting a large or highly complex
bank’s long-term performance.12
As described in more detail below,
the FDIC is proposing to amend the
assessment regulations to remove the
double counting of a portion of the
CECL transitional amounts in the
calculation of the loss severity measure
and certain other financial measures
that are calculated by summing Tier 1
capital and reserves, which are used to
determine assessment rates for large and
highly complex banks.
B. The Current Expected Credit Losses
Methodology
In 2016, the Financial Accounting
Standards Board (FASB) issued
Accounting Standards Update (ASU)
No. 2016–13, Financial Instruments—
Credit Losses, Topic 326, Measurement
of Credit Losses on Financial
Instruments.13 The ASU resulted in
significant changes to credit loss
accounting under U.S. generally
accepted accounting principles (GAAP).
The revisions to credit loss accounting
under GAAP included the introduction
of CECL, which replaces the incurred
loss methodology for financial assets
measured at amortized cost. For these
assets, CECL requires banking
organizations to recognize lifetime
expected credit losses and to
incorporate reasonable and supportable
forecasts in developing the estimate of
lifetime expected credit losses, while
also maintaining the current
requirement that banking organizations
consider past events and current
conditions.
CECL allowances cover a broader
range of financial assets than the
allowance for loan and lease losses
(ALLL) under the incurred loss
methodology. Under the incurred loss
methodology, the ALLL generally covers
credit losses on loans held for
investment and lease financing
receivables, with additional allowances
for certain other extensions of credit and
allowances for credit losses on certain
off-balance sheet credit exposures (with
the latter allowances presented as
liabilities).14 These exposures will be
within the scope of CECL. In addition,
CECL applies to credit losses on held-
to-maturity (HTM) debt securities. ASU
2016–13 also introduces new
requirements for available-for-sale (AFS)
debt securities. The new accounting
standard requires that a banking
organization recognize credit losses on
individual AFS debt securities through
credit loss allowances, rather than
through direct write-downs, as is
currently required under U.S. GAAP.
The credit loss allowances attributable
to debt securities are separate from the
credit loss allowances attributable to
loans and leases.
C. The 2019 CECL Rule
Upon adoption of CECL, a banking
organization will record a one-time
adjustment to its credit loss allowances
as of the beginning of its fiscal year of
adoption equal to the difference, if any,
between the amount of credit loss
allowances required under the incurred
loss methodology and the amount of
credit loss allowances required under
CECL. A banking organization’s
implementation of CECL will affect its
retained earnings, deferred tax assets
VerDate Sep<11>2014 17:11 Dec 04, 2020 Jkt 253001 PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 E:\FR\FM\07DEP1.SGM 07DEP1
khammond on DSKJM1Z7X2PROD with PROPOSALS