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Law360 (March 27, 2020, 10:28 PM EDT ) Federal regulators said Friday that big banks can wait longer before phasing in the regulatory capital effects of a new loan loss accounting standard and can choose to switch over early to an updated methodology for calculating certain capital requirements, moves intended to buoy bank lending during the COVID-19 pandemic.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued an emergency rule stating that banks required to adopt the current expected credit losses, or CECL, accounting standard in 2020 may delay its estimated impact on their regulatory capital for two years.
That's on top of an optional three-year transition period finalized by regulators in 2018, and longer than the CECL compliance delay included in the coronavirus relief legislation signed by President Donald Trump on Friday.
"With the five-year transition option provided by the interim final rule, banking organizations have time to adapt capital planning under stress to the new standard, improving their flexibility and enhancing their ability to serve as a source of credit to the U.S. economy," the agencies said in the rule.
CECL changes when and how banks account for expected future losses on their assets and has been controversial because of its potential impact on banks' capital and willingness to lend in times of economic stress.
Although the agencies noted they originally expected the new standard's introduction to have only a "modest effect" on banks, they said the massive economic upheaval caused by the coronavirus pandemic has complicated implementation.
"The interim final rule is intended to mitigate some of the uncertainty that comes with the increase in credit loss allowances during a challenging economic environment by temporarily limiting the approximate effects of CECL in regulatory capital," the agencies said. "This will allow banking organizations to better focus on supporting lending to creditworthy households and businesses."
In a separate notice, the three agencies said they will also allow banks to start implementing their standardized approach for measuring counterparty credit risk, or SA-CCR, rule, one quarter early.
Finalized late last year, the SA-CCR rule sets out a more risk-sensitive approach for banks to calculate how much capital they must hold against their derivative contracts. By letting banks make the switch early, the agencies said they hope to "improve current market liquidity and smooth disruptions."
"The notice should help to mitigate the impact of recent dislocations in the U.S. economy as a result of COVID-19," the agencies said.
--Editing by Michael Watanabe.
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