After industry groups stressed the need to adopt regulatory changes in light of the COVID-19 pandemic, on March 27, 2020, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency (collectively, the “Banking Agencies”) issued a joint press release announcing an interim final rule (the “interim final rule”) allowing banks to delay the effects of the current expected credit loss (“CECL”) accounting standard until 2022. The interim final rule is expected to allow banks to free up regulatory capital and focus on lending to consumers and businesses during the COVID-19 pandemic.
In 2019, the Banking Agencies issued a final rule that changed the credit losses accounting standard for banks that use the U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) (the “2019 rule”). Issued by the Financial Accounting Standards Board, the CECL standard changes how banks account for credit losses. Instead of the current “incurred loss” accounting standard, which requires banks to record losses when it is probable that a loss event has occurred, the CECL standard requires banks to record expected credit losses at the time of loan origination.
Compared to the incurred loss standard, which does not require banks to conduct forward-looking economic forecasts or consider industry-specific cycles, CECL is a forward-looking standard that requires banks to consider these factors over the life of a loan. These changes were made after the 2008 financial crisis to enhance transparency and provide more accurate information on a bank’s financial health. Banks, however, have stressed that CECL will limit their ability to respond during economic downturns and generally expect that the widespread implementation of CECL will generally mean an increase in loan loss reserves.
The interim final rule provides banks adopting CECL in the 2020 calendar year the option to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay. These delays will total to a five-year transition period.
The interim final rule is in addition to the current three-year transition option in the 2019 rule, which is available to any bank at the time that it adopts CECL. Banks that already have adopted CECL will have the option to elect the three-year transition option contained in the 2019 CECL rule, or the five-year transition contained in the interim final rule.
Despite calls from industry groups for a delay of CECL implementation for all financial institutions, including banks, non-banks, and captive finance companies, only banks required to adopt CECL for purposes of U.S. GAAP (as in effect January 1, 2020) for a fiscal year that begins during the 2020 calendar year are eligible. The interim final rule is effective starting March 31, 2020. Public comment on the interim final rule is open through May 15, 2020. The interim final rule can be found here.
The U.S. financial regulatory agencies have each established webpages dedicated to the COVID-19 pandemic. In addition, Norton Rose Fulbright has established a webpage focused on the COVID-19 pandemic, offering a wide variety of information and training resources.