Banking Agencies Issue Final Rule Delaying CECL Impact on Regulatory Capital

The FDIC, OCC, and FRB recently issued a final rule allowing banks to delay for two years the estimated impact on regulatory capital caused by the implementation of the Current Expected Credit Losses (CECL) methodology.

The final rule is substantially consistent with the interim final rule, with the exception of some clarifications regarding the calculation of the transition provision that were added in response to public comments.  Additionally, the final rule expands eligibility for the new transition period to banking organizations that voluntarily adopt CECL during the 2020 calendar year.  WBK wrote about the interim final rule on April 9, 2020, and the Agencies’ technical correction on May 7, 2020.

The final rule, which went into effect on September 30, 2020, does not alter the three-year transition period originally included in the 2019 rule that required the implementation of CECL.  Rather, banks that were required to convert to CECL in 2020 may now postpone the regulatory capital impact of CECL until 2022, when they then have three years to phase in any capital impact, which is to be calculated quarterly using a 25% scaling factor.

The Agencies granted the additional two-year transition period as a form of relief in light of the “additional operational challenges and resource burden of implementing CECL amid the uncertainty cause by recent strains on the U.S. economy” during the COVID crisis.  It is intended to allow banking organizations to “better focus on supporting lending to creditworthy households and businesses, while maintaining the quality of regulatory capital and reducing the potential for competitive inequities across banking organizations.”