Dive Brief:
- Banks required to convert to the current expected credit losses (CECL) accounting standard this year can delay the estimated regulatory capital effects until 2022, the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC) said in a press release Friday.
- Additionally, lenders have three years to phase in any capital hits that would have taken place during the two-year delay, according to the agencies' interim final rule.
- The switch to CECL is expected to significantly increase the amount of cash banks set aside to cover impaired loans. That would cut into banks' regulatory capital and, in turn, profitability.
Dive Insight:
Friday's interim final rule goes beyond a previously proposed tweak to CECL compliance. The $2 trillion stimulus package approved last week gave banks until the end of this year to postpone CECL adoption.
CECL requires banks to forecast losses on the life of a loan as soon as they originate and record it on their balance sheet. Previously, banks did not record losses until an event persuaded them that a borrower may not be able to make loan payments in full.
JPMorgan Chase, in its latest quarterly earnings statement in January, said it expected total loan loss reserves to increase by 30% over the next three years as a result of adopting CECL in 2020. That adoption equates to a $2.7 billion drain on the bank’s equity capital, it said.
Friday’s rule change is not mandatory. Banks can continue to use guidance from February 2019 that lets them phase in CECL’s day-one impact on regulatory capital over three years.
Public comment on the interim final rule is open for 45 days.
