4222 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations
1 83 FR 22312 (May 14, 2018).
2 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.
3 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 Board’s Small Bank Holding
Company Policy Statement (12 CFR part 225,
Appendix C), but exclude certain savings and loan
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 1, 3, 5, 23, 24, 32, and 46
[Docket ID OCC–2018–0009]
RIN 1557–AE32
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 211, 215, 217, 223,
225, and 252
[Regulation Q; Docket No. R–1605]
RIN 7100–AF04
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 324, 325, 327, 347, and
390
RIN 3064–AE74
Regulatory Capital Rule:
Implementation and Transition of the
Current Expected Credit Losses
Methodology for Allowances and
Related Adjustments to the Regulatory
Capital Rule and Conforming
Amendments to Other Regulations
AGENCY: Office of the Comptroller of the
Currency, Treasury; the Board of
Governors of the Federal Reserve
System; and the Federal Deposit
Insurance Corporation.
ACTION: Final rule.
SUMMARY: The Office of the Comptroller
of the Currency, the Board of Governors
of the Federal Reserve System, and the
Federal Deposit Insurance Corporation
(collectively, the agencies) are adopting
a final rule to address changes to credit
loss accounting under U.S. generally
accepted accounting principles,
including banking organizations’
implementation of the current expected
credit losses methodology (CECL). The
final rule provides banking
organizations the option to phase in
over a three-year period the day-one
adverse effects on regulatory capital that
may result from the adoption of the new
accounting standard. In addition, the
final rule revises the agencies’
regulatory capital rule, stress testing
rules, and regulatory disclosure
requirements to reflect CECL, and makes
conforming amendments to other
regulations that reference credit loss
allowances.
DATES: The final rule is effective on
April 1, 2019. Banking organizations
may early adopt this final rule prior to
that date.
FOR FURTHER INFORMATION CONTACT:
OCC: Mark Ginsberg, Senior Risk
Expert or JungSup Kim, Risk Specialist,
Capital Policy Division, (202) 649–6983;
or Kevin Korzeniewski, Counsel, Office
of the Chief Counsel, (202) 649–5490; or
for persons who are hearing impaired,
TTY, (202) 649–5597.
Board: Constance M. Horsley, Deputy
Associate Director, (202) 452–5239; Juan
C. Climent, Manager, (202) 872–7526;
Andrew Willis, Senior Supervisory
Financial Analyst, (202) 912–4323; or
Noah Cuttler, Senior Financial Analyst,
(202) 912–4678, Division of Supervision
and Regulation; or Benjamin W.
McDonough, Assistant General Counsel,
(202) 452–2036; David W. Alexander,
Counsel, (202) 452–2877; or Asad
Kudiya, Counsel, (202) 475–6358, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Benedetto Bosco, Chief,
bbosco@fdic.gov; Richard Smith, Capital
Markets Policy Analyst, rismith@
fdic.gov; David Riley, Senior Policy
Analyst, dariley@fdic.gov; Capital
Markets Branch, Division of Risk
Management Supervision,
regulatorycapital@fdic.gov, (202) 898–
6888; or Michael Phillips, Acting
Supervisory Counsel, mphillips@
fdic.gov; Catherine Wood, Counsel,
cawood@fdic.gov; Suzanne Dawley,
Counsel, sudawley@fdic.gov; or Alec
Bonander, Attorney, abonander@
fdic.gov; Supervision Branch, Legal
Division, Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Overview
A. Background
B. Changes to U.S. GAAP
C. Regulatory Capital
II. Summary of the Proposal
A. Proposed Revisions to the Capital Rule
To Reflect the Change in U.S. GAAP
B. Summary of Comments Received on the
Proposal
III. Final Rule
A. Changes to the Capital Rule To Reflect
the Change in U.S. GAAP
1. Introduction of Adjusted Allowances for
Credit Losses as a New Defined Term
2. Definition of Carrying Value
B. CECL Transition Provision
1. Election of the Optional CECL Transition
Provision
2. Mechanics of the CECL Transition
Provision
3. Business Combinations
4. Supervisory Oversight
C. Additional Requirements for Advanced
Approaches Banking Organizations
D. Disclosures and Regulatory Reporting
E. Conforming Changes to Other Agency
Regulations
1. OCC Regulations
2. Board Regulations
3. FDIC Regulations
IV. Long Term Considerations With CECL
V. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of
1995
E. Small Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA)
F. Administrative Procedure Act and
Riegle Community Development and
Regulatory Improvement Act of 1994
I. Overview
A. Background
On May 14, 2018, the Office of the
Comptroller of the Currency (OCC), the
Board of Governors of the Federal
Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC)
(collectively, the agencies) issued a
notice of proposed rulemaking (NPR or
proposal) that would have revised
certain of their regulations to account
for forthcoming changes to credit loss
accounting under U.S. generally
accepted accounting principles (U.S.
GAAP).1 In particular, the proposal
would have amended certain of the
agencies’ rules to address the Financial
Accounting Standards Board’s (FASB)
issuance of Accounting Standards
Update No. 2016–13, Financial
Instruments—Credit Losses, Topic 326,
Measurement of Credit Losses on
Financial Instruments (ASU 2016–13).2
ASU 2016–13 introduces the current
expected credit losses methodology
(CECL), which replaces the incurred
loss methodology for financial assets
measured at amortized cost; introduces
the term purchased credit deteriorated
(PCD) assets, which replaces the term
purchased credit-impaired (PCI) assets;
and modifies the treatment of credit
losses on available-for-sale (AFS) debt
securities.
The proposal would have applied to
banking organizations 3 that are subject
VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2
1 83 FR 22312 (May 14, 2018).
2 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.
3 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 Board’s Small Bank Holding
Company Policy Statement (12 CFR part 225,
Appendix C), but exclude certain savings and loan
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 1, 3, 5, 23, 24, 32, and 46
[Docket ID OCC–2018–0009]
RIN 1557–AE32
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 211, 215, 217, 223,
225, and 252
[Regulation Q; Docket No. R–1605]
RIN 7100–AF04
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 324, 325, 327, 347, and
390
RIN 3064–AE74
Regulatory Capital Rule:
Implementation and Transition of the
Current Expected Credit Losses
Methodology for Allowances and
Related Adjustments to the Regulatory
Capital Rule and Conforming
Amendments to Other Regulations
AGENCY: Office of the Comptroller of the
Currency, Treasury; the Board of
Governors of the Federal Reserve
System; and the Federal Deposit
Insurance Corporation.
ACTION: Final rule.
SUMMARY: The Office of the Comptroller
of the Currency, the Board of Governors
of the Federal Reserve System, and the
Federal Deposit Insurance Corporation
(collectively, the agencies) are adopting
a final rule to address changes to credit
loss accounting under U.S. generally
accepted accounting principles,
including banking organizations’
implementation of the current expected
credit losses methodology (CECL). The
final rule provides banking
organizations the option to phase in
over a three-year period the day-one
adverse effects on regulatory capital that
may result from the adoption of the new
accounting standard. In addition, the
final rule revises the agencies’
regulatory capital rule, stress testing
rules, and regulatory disclosure
requirements to reflect CECL, and makes
conforming amendments to other
regulations that reference credit loss
allowances.
DATES: The final rule is effective on
April 1, 2019. Banking organizations
may early adopt this final rule prior to
that date.
FOR FURTHER INFORMATION CONTACT:
OCC: Mark Ginsberg, Senior Risk
Expert or JungSup Kim, Risk Specialist,
Capital Policy Division, (202) 649–6983;
or Kevin Korzeniewski, Counsel, Office
of the Chief Counsel, (202) 649–5490; or
for persons who are hearing impaired,
TTY, (202) 649–5597.
Board: Constance M. Horsley, Deputy
Associate Director, (202) 452–5239; Juan
C. Climent, Manager, (202) 872–7526;
Andrew Willis, Senior Supervisory
Financial Analyst, (202) 912–4323; or
Noah Cuttler, Senior Financial Analyst,
(202) 912–4678, Division of Supervision
and Regulation; or Benjamin W.
McDonough, Assistant General Counsel,
(202) 452–2036; David W. Alexander,
Counsel, (202) 452–2877; or Asad
Kudiya, Counsel, (202) 475–6358, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Benedetto Bosco, Chief,
bbosco@fdic.gov; Richard Smith, Capital
Markets Policy Analyst, rismith@
fdic.gov; David Riley, Senior Policy
Analyst, dariley@fdic.gov; Capital
Markets Branch, Division of Risk
Management Supervision,
regulatorycapital@fdic.gov, (202) 898–
6888; or Michael Phillips, Acting
Supervisory Counsel, mphillips@
fdic.gov; Catherine Wood, Counsel,
cawood@fdic.gov; Suzanne Dawley,
Counsel, sudawley@fdic.gov; or Alec
Bonander, Attorney, abonander@
fdic.gov; Supervision Branch, Legal
Division, Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Overview
A. Background
B. Changes to U.S. GAAP
C. Regulatory Capital
II. Summary of the Proposal
A. Proposed Revisions to the Capital Rule
To Reflect the Change in U.S. GAAP
B. Summary of Comments Received on the
Proposal
III. Final Rule
A. Changes to the Capital Rule To Reflect
the Change in U.S. GAAP
1. Introduction of Adjusted Allowances for
Credit Losses as a New Defined Term
2. Definition of Carrying Value
B. CECL Transition Provision
1. Election of the Optional CECL Transition
Provision
2. Mechanics of the CECL Transition
Provision
3. Business Combinations
4. Supervisory Oversight
C. Additional Requirements for Advanced
Approaches Banking Organizations
D. Disclosures and Regulatory Reporting
E. Conforming Changes to Other Agency
Regulations
1. OCC Regulations
2. Board Regulations
3. FDIC Regulations
IV. Long Term Considerations With CECL
V. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of
1995
E. Small Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA)
F. Administrative Procedure Act and
Riegle Community Development and
Regulatory Improvement Act of 1994
I. Overview
A. Background
On May 14, 2018, the Office of the
Comptroller of the Currency (OCC), the
Board of Governors of the Federal
Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC)
(collectively, the agencies) issued a
notice of proposed rulemaking (NPR or
proposal) that would have revised
certain of their regulations to account
for forthcoming changes to credit loss
accounting under U.S. generally
accepted accounting principles (U.S.
GAAP).1 In particular, the proposal
would have amended certain of the
agencies’ rules to address the Financial
Accounting Standards Board’s (FASB)
issuance of Accounting Standards
Update No. 2016–13, Financial
Instruments—Credit Losses, Topic 326,
Measurement of Credit Losses on
Financial Instruments (ASU 2016–13).2
ASU 2016–13 introduces the current
expected credit losses methodology
(CECL), which replaces the incurred
loss methodology for financial assets
measured at amortized cost; introduces
the term purchased credit deteriorated
(PCD) assets, which replaces the term
purchased credit-impaired (PCI) assets;
and modifies the treatment of credit
losses on available-for-sale (AFS) debt
securities.
The proposal would have applied to
banking organizations 3 that are subject
VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2
4223Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations
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.
4 12 CFR part 3 (OCC); 12 CFR part 217 (Board);
12 CFR part 324 (FDIC).
5 See 12 U.S.C. 1831n; see also Instructions for
Preparation of Consolidated Financial Statements
for Holding Companies, Reporting Form FR Y–9C
(Reissued March 2013); Instructions for Preparation
of Consolidated Reports of Condition and Income,
Reporting Forms FFIEC 031 and FFIEC 041
(updated September 2017); Instructions for
Preparation of Consolidated Reports of Condition
and Income for a Bank with Domestic Offices Only
and Total Assets Less than $1 Billion, Reporting
Form FFIEC 051 (updated September 2017).
6 ‘‘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 agencies note that credit
losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not
recognized under CECL.
7 For this purpose, an SEC filer is an entity (e.g.,
a bank holding company or savings and loan
holding company) that is required to file its
financial statements with the SEC under the federal
securities laws or, for an insured depository
institution, the appropriate federal banking agency
under section 12(i) of the Securities Exchange Act
of 1934. The banking agencies named under section
12(i) of the Securities Exchange Act of 1934 are the
OCC, the Board, and the FDIC.
8 A PBE that is not an SEC filer would include:
(1) An entity that has issued securities that are
traded, listed, or quoted on an over-the-counter
market, and (2) an entity that has issued one or
more securities that are not subject to contractual
restrictions on transfer and is required by law,
contract, or regulation to prepare U.S. GAAP
financial statements (including footnotes) and make
them publicly available periodically (e.g., pursuant
to Section 36 of the Federal Deposit Insurance Act
and Part 363 of the FDIC’s rules). For further
information on the definition of a PBE, refer to ASU
2013–12, Definition of a Public Business Entity,
issued in December 2013.
to the agencies’ regulatory capital rule 4
(capital rule), to banking organizations
that are subject to stress testing
requirements, and to banking
organizations that file regulatory reports
that are uniform and consistent with
U.S. GAAP.5 In particular, the proposal
would have revised the agencies’ capital
rule to distinguish which credit loss
allowances under the new accounting
standard would be eligible for inclusion
in a banking organization’s regulatory
capital. The proposal would also have
provided banking organizations that
experience a reduction in retained
earnings as a result of adopting CECL
with an option to elect a three-year
transition period to phase in the effects
of CECL adoption on regulatory capital.
The proposal also would have revised
regulatory capital disclosure
requirements applicable to certain
banking organizations, amended
references to credit loss allowances in
other regulations, and required the
inclusion of CECL provisions in a
banking organization’s company-run
stress testing projections beginning with
the 2020 stress test cycle.
The agencies are adopting as final the
proposal. The final rule is effective as of
April 1, 2019, but a banking
organization may choose to adopt the
final rule starting as early as first quarter
2019.
B. Changes to U.S. GAAP
ASU 2016–13 revises U.S. GAAP and,
consequently, affects regulatory reports
based on U.S. GAAP. CECL differs from
the incurred loss methodology in
several key respects. First, for financial
assets measured at amortized cost, CECL
requires banking organizations to
recognize lifetime expected credit
losses, not just credit losses incurred as
of the reporting date. CECL requires the
incorporation of reasonable and
supportable forecasts in developing an
estimate of lifetime expected credit
losses, while also maintaining the
current requirement that banking
organizations consider past events and
current conditions. Furthermore, the
probable threshold for recognition of
allowances in accordance with the
incurred loss methodology is removed
under CECL. Taken together, estimating
expected credit losses over the life of an
asset under CECL, including
consideration of reasonable and
supportable forecasts but without
applying the probable threshold that
exists under the incurred loss
methodology, results in earlier
recognition of credit losses.
CECL replaces multiple impairment
approaches in existing U.S. GAAP.
CECL allowances will 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, 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).6 These exposures will be
within the scope of CECL. In addition,
CECL applies to credit losses on held-
to-maturity (HTM) debt securities. As
previously mentioned, ASU 2016–13
replaces the term PCI assets with the
term PCD assets. The PCD asset
definition covers a broader range of
assets than the PCI asset definition.
CECL requires banking organizations to
estimate and record a credit loss
allowance for a PCD asset at the time of
purchase. This credit loss allowance is
then added to the purchase price to
determine the purchase date amortized
cost basis of the asset for financial
reporting purposes. Post-acquisition
changes in credit loss allowances on
PCD assets will be established through
earnings. This is different from the
current treatment of PCI assets, for
which banking organizations are not
permitted to estimate and recognize
credit loss allowances at the time of
purchase. Rather, banking organizations
generally estimate credit loss
allowances for PCI assets subsequent to
the purchase only if there is
deterioration in the expected cash flows
from such assets.
ASU 2016–13 also introduces new
requirements for 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. AFS debt securities
will continue to be measured at fair
value, with changes in fair value not
related to credit losses recognized in
other comprehensive income. Credit
loss allowances on an AFS debt security
are limited to the amount by which the
security’s fair value is less than its
amortized cost.
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. Except for PCD assets, banking
organizations will recognize the
adjustment to the credit loss allowances
with offsetting entries to deferred tax
assets (DTAs), if appropriate, and to the
fiscal year’s beginning retained
earnings.
The effective date of ASU 2016–13
varies for different banking
organizations. For banking organizations
that are U.S. Securities and Exchange
Commission (SEC) filers,7 ASU 2016–13
will become effective for the first fiscal
year beginning after December 15, 2019,
including interim periods within that
fiscal year. For banking organizations
that are public business entities (PBE)
but not SEC filers (as defined in U.S.
GAAP),8 ASU 2016–13 will become
effective for the first fiscal year
beginning after December 15, 2020,
including interim periods within that
VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2
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.
4 12 CFR part 3 (OCC); 12 CFR part 217 (Board);
12 CFR part 324 (FDIC).
5 See 12 U.S.C. 1831n; see also Instructions for
Preparation of Consolidated Financial Statements
for Holding Companies, Reporting Form FR Y–9C
(Reissued March 2013); Instructions for Preparation
of Consolidated Reports of Condition and Income,
Reporting Forms FFIEC 031 and FFIEC 041
(updated September 2017); Instructions for
Preparation of Consolidated Reports of Condition
and Income for a Bank with Domestic Offices Only
and Total Assets Less than $1 Billion, Reporting
Form FFIEC 051 (updated September 2017).
6 ‘‘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 agencies note that credit
losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not
recognized under CECL.
7 For this purpose, an SEC filer is an entity (e.g.,
a bank holding company or savings and loan
holding company) that is required to file its
financial statements with the SEC under the federal
securities laws or, for an insured depository
institution, the appropriate federal banking agency
under section 12(i) of the Securities Exchange Act
of 1934. The banking agencies named under section
12(i) of the Securities Exchange Act of 1934 are the
OCC, the Board, and the FDIC.
8 A PBE that is not an SEC filer would include:
(1) An entity that has issued securities that are
traded, listed, or quoted on an over-the-counter
market, and (2) an entity that has issued one or
more securities that are not subject to contractual
restrictions on transfer and is required by law,
contract, or regulation to prepare U.S. GAAP
financial statements (including footnotes) and make
them publicly available periodically (e.g., pursuant
to Section 36 of the Federal Deposit Insurance Act
and Part 363 of the FDIC’s rules). For further
information on the definition of a PBE, refer to ASU
2013–12, Definition of a Public Business Entity,
issued in December 2013.
to the agencies’ regulatory capital rule 4
(capital rule), to banking organizations
that are subject to stress testing
requirements, and to banking
organizations that file regulatory reports
that are uniform and consistent with
U.S. GAAP.5 In particular, the proposal
would have revised the agencies’ capital
rule to distinguish which credit loss
allowances under the new accounting
standard would be eligible for inclusion
in a banking organization’s regulatory
capital. The proposal would also have
provided banking organizations that
experience a reduction in retained
earnings as a result of adopting CECL
with an option to elect a three-year
transition period to phase in the effects
of CECL adoption on regulatory capital.
The proposal also would have revised
regulatory capital disclosure
requirements applicable to certain
banking organizations, amended
references to credit loss allowances in
other regulations, and required the
inclusion of CECL provisions in a
banking organization’s company-run
stress testing projections beginning with
the 2020 stress test cycle.
The agencies are adopting as final the
proposal. The final rule is effective as of
April 1, 2019, but a banking
organization may choose to adopt the
final rule starting as early as first quarter
2019.
B. Changes to U.S. GAAP
ASU 2016–13 revises U.S. GAAP and,
consequently, affects regulatory reports
based on U.S. GAAP. CECL differs from
the incurred loss methodology in
several key respects. First, for financial
assets measured at amortized cost, CECL
requires banking organizations to
recognize lifetime expected credit
losses, not just credit losses incurred as
of the reporting date. CECL requires the
incorporation of reasonable and
supportable forecasts in developing an
estimate of lifetime expected credit
losses, while also maintaining the
current requirement that banking
organizations consider past events and
current conditions. Furthermore, the
probable threshold for recognition of
allowances in accordance with the
incurred loss methodology is removed
under CECL. Taken together, estimating
expected credit losses over the life of an
asset under CECL, including
consideration of reasonable and
supportable forecasts but without
applying the probable threshold that
exists under the incurred loss
methodology, results in earlier
recognition of credit losses.
CECL replaces multiple impairment
approaches in existing U.S. GAAP.
CECL allowances will 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, 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).6 These exposures will be
within the scope of CECL. In addition,
CECL applies to credit losses on held-
to-maturity (HTM) debt securities. As
previously mentioned, ASU 2016–13
replaces the term PCI assets with the
term PCD assets. The PCD asset
definition covers a broader range of
assets than the PCI asset definition.
CECL requires banking organizations to
estimate and record a credit loss
allowance for a PCD asset at the time of
purchase. This credit loss allowance is
then added to the purchase price to
determine the purchase date amortized
cost basis of the asset for financial
reporting purposes. Post-acquisition
changes in credit loss allowances on
PCD assets will be established through
earnings. This is different from the
current treatment of PCI assets, for
which banking organizations are not
permitted to estimate and recognize
credit loss allowances at the time of
purchase. Rather, banking organizations
generally estimate credit loss
allowances for PCI assets subsequent to
the purchase only if there is
deterioration in the expected cash flows
from such assets.
ASU 2016–13 also introduces new
requirements for 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. AFS debt securities
will continue to be measured at fair
value, with changes in fair value not
related to credit losses recognized in
other comprehensive income. Credit
loss allowances on an AFS debt security
are limited to the amount by which the
security’s fair value is less than its
amortized cost.
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. Except for PCD assets, banking
organizations will recognize the
adjustment to the credit loss allowances
with offsetting entries to deferred tax
assets (DTAs), if appropriate, and to the
fiscal year’s beginning retained
earnings.
The effective date of ASU 2016–13
varies for different banking
organizations. For banking organizations
that are U.S. Securities and Exchange
Commission (SEC) filers,7 ASU 2016–13
will become effective for the first fiscal
year beginning after December 15, 2019,
including interim periods within that
fiscal year. For banking organizations
that are public business entities (PBE)
but not SEC filers (as defined in U.S.
GAAP),8 ASU 2016–13 will become
effective for the first fiscal year
beginning after December 15, 2020,
including interim periods within that
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