The Federal Deposit Insurance Corp. agreed to give banks a three-year transition period to soften the blow to their balance sheets from a new standard that will change how they account for losses from soured loans.
The transition period is included in a final rule on the implementation of the current expected credit losses (CECL) methodology that the FDIC voted to approve Tuesday.
CECL, which publicly traded banks must adopt by 2020, will require lenders to book all expected losses from their loans as soon as the loans are issued. The impact of the new standard is expected to be significant, with overall expected credit loss reserve levels predicted to increase by as much as 35% to 50% by some estimates.
“It is possible that despite adequate capital planning, uncertainty about the economic environment at the time of CECL adoption could result in higher-than-anticipated increases in credit loss allowances,” the final rule noted.
As a result, it continued, banks will have the option “to phase in over a three-year period the day-one adverse effects of CECL on the banking organization’s regulatory capital ratios.”
The American Bankers Association joined the Bank Policy Institute, the Credit Union National Association, the Consumer Bankers Association, and the National Association of Federally Insured Credit Unions in expressing concern about the potentially disruptive effects of CECL.
In a statement Tuesday, the ABA said the phase-in period does not go far enough to address those concerns.
“Banks have long been concerned about CECL’s cost and impact on our ability serve our customers and communities, particularly in times of economic stress,” ABA Chief Executive Rob Nichols said. “That’s why ABA believes CECL must be delayed until a quantitative impact study can be conducted and the economic consequences of the accounting standard are fully understood.”
In comments on the final rule, some commenters favored a five-year transition period while others suggested, instead of a transition provision, regulators should provide a temporary neutralization adjustment of CET1 capital while further consideration of the effects of CECL is undertaken.