Bank Regulators Propose Phase-in Implementation of Credit Loss Standard

December 10, 2018

As banks, industry groups, and others continue to raise concerns over Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, three bank regulators have a plan to reduce the capital effects of the Financial Accounting Standards Board’s credit loss standard.

The Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation have proposed a phased-in implementation of the current expected credit loss model. Over a three-year period, banks could phase in the standard’s adverse effects on regulatory capital when they implement the new accounting guidance. This phase in would allow banks to alleviate the impact on their capital base by distributing the effects.

Speaking on the proposal this month, the Federal Reserve’s Randal Quarles said a phased-in approach would give regulators more time to see how the standard is working before it is fully administered. The Federal Reserve’s vice chairman of supervision also noted that it is uncertain how the CECL model will affect small and large firms, so regulators need to have time to understand the implications.

In April, the regulators issued Regulatory Capital Rules: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rules and Conforming Amendments to Other Regulations. They expect to complete the rulemaking early next year, which will give public banks time to review their systems before implementing the new standard in 2020.