Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations, 4222-4250 [2018-28281]

Download as PDF 4222 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations FOR FURTHER INFORMATION CONTACT: DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 1, 3, 5, 23, 24, 32, and 46 [Docket ID OCC–2018–0009] RIN 1557–AE32 FEDERAL RESERVE SYSTEM 12 CFR Parts 208, 211, 215, 217, 223, 225, and 252 [Regulation Q; Docket No. R–1605] RIN 7100–AF04 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Parts 324, 325, 327, 347, and 390 RIN 3064–AE74 Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation. ACTION: Final rule. AGENCY: The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) are adopting a final rule to address changes to credit loss accounting under U.S. generally accepted accounting principles, including banking organizations’ implementation of the current expected credit losses methodology (CECL). The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In addition, the final rule revises the agencies’ regulatory capital rule, stress testing rules, and regulatory disclosure requirements to reflect CECL, and makes conforming amendments to other regulations that reference credit loss allowances. SUMMARY: The final rule is effective on April 1, 2019. Banking organizations may early adopt this final rule prior to that date. DATES: VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 OCC: Mark Ginsberg, Senior Risk Expert or JungSup Kim, Risk Specialist, Capital Policy Division, (202) 649–6983; or Kevin Korzeniewski, Counsel, Office of the Chief Counsel, (202) 649–5490; or for persons who are hearing impaired, TTY, (202) 649–5597. Board: Constance M. Horsley, Deputy Associate Director, (202) 452–5239; Juan C. Climent, Manager, (202) 872–7526; Andrew Willis, Senior Supervisory Financial Analyst, (202) 912–4323; or Noah Cuttler, Senior Financial Analyst, (202) 912–4678, Division of Supervision and Regulation; or Benjamin W. McDonough, Assistant General Counsel, (202) 452–2036; David W. Alexander, Counsel, (202) 452–2877; or Asad Kudiya, Counsel, (202) 475–6358, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263–4869. FDIC: Benedetto Bosco, Chief, bbosco@fdic.gov; Richard Smith, Capital Markets Policy Analyst, rismith@ fdic.gov; David Riley, Senior Policy Analyst, dariley@fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, regulatorycapital@fdic.gov, (202) 898– 6888; or Michael Phillips, Acting Supervisory Counsel, mphillips@ fdic.gov; Catherine Wood, Counsel, cawood@fdic.gov; Suzanne Dawley, Counsel, sudawley@fdic.gov; or Alec Bonander, Attorney, abonander@ fdic.gov; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. SUPPLEMENTARY INFORMATION: Table of Contents I. Overview A. Background B. Changes to U.S. GAAP C. Regulatory Capital II. Summary of the Proposal A. Proposed Revisions to the Capital Rule To Reflect the Change in U.S. GAAP B. Summary of Comments Received on the Proposal III. Final Rule A. Changes to the Capital Rule To Reflect the Change in U.S. GAAP 1. Introduction of Adjusted Allowances for Credit Losses as a New Defined Term 2. Definition of Carrying Value B. CECL Transition Provision 1. Election of the Optional CECL Transition Provision 2. Mechanics of the CECL Transition Provision 3. Business Combinations 4. Supervisory Oversight C. Additional Requirements for Advanced Approaches Banking Organizations PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 D. Disclosures and Regulatory Reporting E. Conforming Changes to Other Agency Regulations 1. OCC Regulations 2. Board Regulations 3. FDIC Regulations IV. Long Term Considerations With CECL V. Regulatory Analysis A. Paperwork Reduction Act B. Regulatory Flexibility Act C. Plain Language D. OCC Unfunded Mandates Reform Act of 1995 E. Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) F. Administrative Procedure Act and Riegle Community Development and Regulatory Improvement Act of 1994 I. Overview A. Background On May 14, 2018, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) issued a notice of proposed rulemaking (NPR or proposal) that would have revised certain of their regulations to account for forthcoming changes to credit loss accounting under U.S. generally accepted accounting principles (U.S. GAAP).1 In particular, the proposal would have amended certain of the agencies’ rules to address the Financial Accounting Standards Board’s (FASB) issuance of Accounting Standards Update No. 2016–13, Financial Instruments—Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments (ASU 2016–13).2 ASU 2016–13 introduces the current expected credit losses methodology (CECL), which replaces the incurred loss methodology for financial assets measured at amortized cost; introduces the term purchased credit deteriorated (PCD) assets, which replaces the term purchased credit-impaired (PCI) assets; and modifies the treatment of credit losses on available-for-sale (AFS) debt securities. The proposal would have applied to banking organizations 3 that are subject 1 83 FR 22312 (May 14, 2018). 2016–13 covers measurement of credit losses on financial instruments and includes three subtopics within Topic 326: (i) Subtopic 326–10 Financial Instruments—Credit Losses—Overall; (ii) Subtopic 326–20: Financial Instruments—Credit Losses—Measured at Amortized Cost; and (iii) Subtopic 326–30: Financial Instruments—Credit Losses—Available-for-Sale Debt Securities. 3 Banking organizations subject to the capital rule include national banks, state member banks, state nonmember banks, savings associations, and toptier bank holding companies and savings and loan holding companies domiciled in the United States not subject to the Board’s Small Bank Holding Company Policy Statement (12 CFR part 225, Appendix C), but exclude certain savings and loan 2 ASU E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations to the agencies’ regulatory capital rule 4 (capital rule), to banking organizations that are subject to stress testing requirements, and to banking organizations that file regulatory reports that are uniform and consistent with U.S. GAAP.5 In particular, the proposal would have revised the agencies’ capital rule to distinguish which credit loss allowances under the new accounting standard would be eligible for inclusion in a banking organization’s regulatory capital. The proposal would also have provided banking organizations that experience a reduction in retained earnings as a result of adopting CECL with an option to elect a three-year transition period to phase in the effects of CECL adoption on regulatory capital. The proposal also would have revised regulatory capital disclosure requirements applicable to certain banking organizations, amended references to credit loss allowances in other regulations, and required the inclusion of CECL provisions in a banking organization’s company-run stress testing projections beginning with the 2020 stress test cycle. The agencies are adopting as final the proposal. The final rule is effective as of April 1, 2019, but a banking organization may choose to adopt the final rule starting as early as first quarter 2019. B. Changes to U.S. GAAP ASU 2016–13 revises U.S. GAAP and, consequently, affects regulatory reports based on U.S. GAAP. CECL differs from the incurred loss methodology in several key respects. First, for financial assets measured at amortized cost, CECL requires banking organizations to recognize lifetime expected credit losses, not just credit losses incurred as of the reporting date. CECL requires the incorporation of reasonable and supportable forecasts in developing an estimate of lifetime expected credit losses, while also maintaining the current requirement that banking organizations consider past events and holding companies that are substantially engaged in insurance underwriting or commercial activities or that are estate trusts, and bank holding companies and savings and loan holding companies that are employee stock ownership plans. 4 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC). 5 See 12 U.S.C. 1831n; see also Instructions for Preparation of Consolidated Financial Statements for Holding Companies, Reporting Form FR Y–9C (Reissued March 2013); Instructions for Preparation of Consolidated Reports of Condition and Income, Reporting Forms FFIEC 031 and FFIEC 041 (updated September 2017); Instructions for Preparation of Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only and Total Assets Less than $1 Billion, Reporting Form FFIEC 051 (updated September 2017). VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 current conditions. Furthermore, the probable threshold for recognition of allowances in accordance with the incurred loss methodology is removed under CECL. Taken together, estimating expected credit losses over the life of an asset under CECL, including consideration of reasonable and supportable forecasts but without applying the probable threshold that exists under the incurred loss methodology, results in earlier recognition of credit losses. CECL replaces multiple impairment approaches in existing U.S. GAAP. CECL allowances will cover a broader range of financial assets than the allowance for loan and lease losses (ALLL) under the incurred loss methodology. Under the incurred loss methodology, ALLL generally covers credit losses on loans held for investment and lease financing receivables, with additional allowances for certain other extensions of credit and allowances for credit losses on certain off-balance sheet credit exposures (with the latter allowances presented as liabilities).6 These exposures will be within the scope of CECL. In addition, CECL applies to credit losses on heldto-maturity (HTM) debt securities. As previously mentioned, ASU 2016–13 replaces the term PCI assets with the term PCD assets. The PCD asset definition covers a broader range of assets than the PCI asset definition. CECL requires banking organizations to estimate and record a credit loss allowance for a PCD asset at the time of purchase. This credit loss allowance is then added to the purchase price to determine the purchase date amortized cost basis of the asset for financial reporting purposes. Post-acquisition changes in credit loss allowances on PCD assets will be established through earnings. This is different from the current treatment of PCI assets, for which banking organizations are not permitted to estimate and recognize credit loss allowances at the time of purchase. Rather, banking organizations generally estimate credit loss allowances for PCI assets subsequent to the purchase only if there is deterioration in the expected cash flows from such assets. 6 ‘‘Other extensions of credit’’ includes trade and reinsurance receivables, and receivables that relate to repurchase agreements and securities lending agreements. ‘‘Off-balance sheet credit exposures’’ includes off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, and financial guarantees. The agencies note that credit losses for off-balance sheet credit exposures that are unconditionally cancellable by the issuer are not recognized under CECL. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 4223 ASU 2016–13 also introduces new requirements for AFS debt securities. The new accounting standard requires that a banking organization recognize credit losses on individual AFS debt securities through credit loss allowances, rather than through direct write-downs, as is currently required under U.S. GAAP. AFS debt securities will continue to be measured at fair value, with changes in fair value not related to credit losses recognized in other comprehensive income. Credit loss allowances on an AFS debt security are limited to the amount by which the security’s fair value is less than its amortized cost. Upon adoption of CECL, a banking organization will record a one-time adjustment to its credit loss allowances as of the beginning of its fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances required under the incurred loss methodology and the amount of credit loss allowances required under CECL. Except for PCD assets, banking organizations will recognize the adjustment to the credit loss allowances with offsetting entries to deferred tax assets (DTAs), if appropriate, and to the fiscal year’s beginning retained earnings. The effective date of ASU 2016–13 varies for different banking organizations. For banking organizations that are U.S. Securities and Exchange Commission (SEC) filers,7 ASU 2016–13 will become effective for the first fiscal year beginning after December 15, 2019, including interim periods within that fiscal year. For banking organizations that are public business entities (PBE) but not SEC filers (as defined in U.S. GAAP),8 ASU 2016–13 will become effective for the first fiscal year beginning after December 15, 2020, including interim periods within that 7 For this purpose, an SEC filer is an entity (e.g., a bank holding company or savings and loan holding company) that is required to file its financial statements with the SEC under the federal securities laws or, for an insured depository institution, the appropriate federal banking agency under section 12(i) of the Securities Exchange Act of 1934. The banking agencies named under section 12(i) of the Securities Exchange Act of 1934 are the OCC, the Board, and the FDIC. 8 A PBE that is not an SEC filer would include: (1) An entity that has issued securities that are traded, listed, or quoted on an over-the-counter market, and (2) an entity that has issued one or more securities that are not subject to contractual restrictions on transfer and is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available periodically (e.g., pursuant to Section 36 of the Federal Deposit Insurance Act and Part 363 of the FDIC’s rules). For further information on the definition of a PBE, refer to ASU 2013–12, Definition of a Public Business Entity, issued in December 2013. E:\FR\FM\14FER2.SGM 14FER2 4224 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations fiscal year. For banking organizations that are not PBEs (as defined in U.S. GAAP), ASU 2016–13 will become effective for the first fiscal year beginning after December 15, 2021, including interim periods within those fiscal years.9 A banking organization that chooses to adopt ASU 2016–13 early may do so in a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. The following table provides a summary of the effective dates. CECL EFFECTIVE DATES Regulatory report effective date * U.S. GAAP effective date PBEs that are SEC Filers ............... Other PBEs (Non-SEC Filers) ........ Non-PBEs ........................................ Early Adoption ................................. Fiscal years beginning after 12/15/2019, including interim periods within those fiscal years. Fiscal years beginning after 12/15/2020, including interim periods within those fiscal years. Fiscal years beginning after 12/15/2021, including interim periods within those fiscal years. Early adoption permitted for fiscal years beginning after 12/15/2018, including interim periods within those fiscal years. 3/31/2020. 3/31/2021. 3/31/2022. 3/31 of year of effective date of early adoption of ASU 2016–13. * For institutions with calendar year-ends. C. Regulatory Capital A banking organization’s implementation of CECL will likely affect its retained earnings, DTAs, and allowances and, as a result, its regulatory capital ratios. Retained earnings are a key component of a banking organization’s common equity tier 1 (CET1) capital. An increase in a banking organization’s allowances, including those estimated under CECL, generally will reduce the banking organization’s earnings or retained earnings, and therefore its CET1 capital.10 DTAs arising from temporary differences (temporary difference DTAs) must be included in a banking organization’s risk-weighted assets or deducted from CET1 capital if they exceed certain thresholds. Increases in allowances generally give rise to increases in temporary difference DTAs that will partially offset the reduction in earnings or retained earnings.11 Under the capital rule’s standardized approach for risk-weighted assets (standardized approach), ALLL is included in a banking organization’s tier 2 capital up A. Proposed Revisions to the Capital Rule To Reflect the Change in U.S. GAAP The agencies proposed to amend the capital rule to identify which credit loss allowances under the new accounting standard would be eligible for inclusion in a banking organization’s regulatory capital.16 In particular, the proposal would have added allowance for credit losses (ACL) as a newly defined term in the capital rule. As proposed, ACL would have included credit loss allowances related to financial assets measured at amortized cost, except for allowances for PCD assets. ACL would have been eligible for inclusion in a banking organization’s tier 2 capital subject to the current limit for including ALLL in tier 2 capital under the capital rule’s standardized approach. Further, the agencies proposed to revise the capital rule, as applicable to an advanced approaches banking organization that has adopted CECL, and that has completed the parallel run process, to align the definition of eligible credit reserves with the definition of ACL in the proposal. The proposal would have retained the current limit for eligible credit reserves in tier 2 capital. The proposal also would have provided a separate capital treatment for allowances associated with AFS debt securities and PCD assets that would have applied to all banking organizations upon adoption of ASU 2016–13. 9 The FASB amended the effective date to the periods indicated for non-PBEs through an ASU issued November 15, 2018, ASU No. 2018–19, Codification Improvements to Topic 326: Financial Instruments—Credit Losses. ASU 2016–13 will now take effect for non-PBEs for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Thus, a non-PBE with a calendar year fiscal year must adopt ASU 2016–13 as of January 1, 2022, if the entity does not elect to early adopt prior to January 1, 2022, and would first report in accordance with the credit losses standard in its regulatory reports and any financial statements for March 31, 2022. 10 However, allowances recognized on PCD assets upon adoption of CECL and upon later purchases of PCD assets generally would not reduce the banking organization’s earnings, retained earnings, or CET1 capital. 11 Deferred tax assets are a result of deductible temporary differences and carryforwards which may result in a decrease in taxes payable in future years. 12 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC). Any amount of ALLL greater than the 1.25 percent limit is deducted from standardized total risk-weighted assets. 12 CFR 3.20(d)(3) (OCC); 12 CFR 217.20(d)(3) (Board); 12 CFR 324.20(d)(3) (FDIC). 13 A banking organization is an advanced approaches banking organization if it has consolidated assets of at least $250 billion or if it has consolidated on-balance sheet foreign exposures of at least $10 billion, or if it is a subsidiary of a depository institution, bank holding company, savings and loan holding company, or intermediate holding company that is an advanced approaches banking organization. See 12 CFR 3.100 (OCC); 12 CFR 217.100 (Board); 12 CFR 324.100 (FDIC). On October 31, 2018, the OCC and the Board issued a notice of proposed rulemaking that would modify the definition of an advanced approaches banking organization. On November 20, 2018, the FDIC issued a substantively identical notice of proposed rulemaking. 14 An advanced approaches banking organization is considered to have completed the parallel run process once it has completed the advanced approaches qualification process and received notification from its primary federal regulator pursuant to section 121(d) of subpart E of the capital rule. See 12 CFR 3.121(d) (OCC); 12 CFR 217.121(d) (Board); 12 CFR 324.121(d) (FDIC). 15 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR 217.10(c)(3)(ii) (Board); and 12 CFR 324.10(c)(3)(ii) (FDIC). 16 Note that under section 37 of the Federal Deposit Insurance Act, the accounting principles applicable to reports or statements required to be filed with the agencies by all insured depository institutions must be uniform and consistent with U.S. GAAP. See 12 U.S.C. 1831n(a)(2)(A). Consistency in reporting under the statute would be addressed by the agencies’ proposed CECL revisions to the Call Report pursuant to the Paperwork Reduction Act. See 83 FR 49160 (September 28, 2018). VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 to 1.25 percent of its standardized total risk-weighted assets (excluding standardized market risk-weighted assets, if applicable), as those terms are defined in the rule.12 An advanced approaches banking organization 13 that has completed the parallel run process 14 includes in its advancedapproaches-adjusted total capital any eligible credit reserves that exceed the banking organization’s total expected credit losses, as defined in the capital rule, to the extent that the excess reserve amount does not exceed 0.6 percent of the banking organization’s credit riskweighted assets.15 II. Summary of the Proposal PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations Before the agencies issued the proposal, some banking organizations expressed concerns about the difficulty in capital planning due to the uncertainty about the economic environment at the time of CECL adoption. This is largely because CECL requires banking organizations to consider current and future expected economic conditions to estimate allowances and these conditions will not be known until closer to a banking organization’s CECL adoption date. Therefore, 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. To address these concerns, the agencies proposed to provide a banking organization with 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 proposal also would have revised regulatory capital disclosure requirements 17 that would have applied to certain banking organizations following their adoption of CECL.18 The proposal would have provided conforming amendments to the agencies’ other regulations that refer to credit loss allowances to reflect the implementation of ASU 2016–13. In particular, the proposal would have amended the Board’s and FDIC’s company-run stress testing rules to require a banking organization that has adopted CECL to include its CECL provisions as part of its stress testing projections beginning with the 2020 stress test cycle. Finally, the proposal would not have changed the limit of 1.25 percent of riskweighted assets governing the amount of allowances eligible for inclusion in tier 2 capital. The agencies stated in the proposal that they would intend to monitor the effects of this limit on regulatory capital and bank lending practices. This ongoing monitoring would have included the review of data, including data provided by banking organizations, and would have assisted the agencies in determining whether any further change to the capital rule’s treatment of ACL might be warranted in the future. 17 For the agencies’ proposed revisions to regulatory reports to address the revised accounting for credit losses under ASU 2016–13, including CECL, see 83 FR 49160 (September 28, 2018). 18 For certain banking organizations, sections 63 and 173 of the capital rule requires disclosure of items such as capital structure, capital adequacy, credit risk, and credit risk mitigation. VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 B. Summary of Comments Received on the Proposal The agencies received 25 comment letters from banking organizations, trade associations, public interest groups, and individuals. Most commenters supported the agencies’ proposal to provide an option to elect temporary regulatory capital relief as banking organizations adopt CECL. Most commenters also requested further additional measures for addressing CECL’s effect on regulatory capital. Many commenters supported the agencies’ proposal to provide a threeyear transition provision to phase-in CECL’s day-one effect on a banking organization’s regulatory capital ratios, with most of these commenters favoring a longer five-year transition period. Some commenters offered targeted recommendations regarding implementation of a transition provision that would phase in CECL’s effect in periods after CECL’s day-one implementation. Several commenters requested that, instead of a transition provision, the agencies should provide a temporary neutralization adjustment of CET1 capital while further consideration of the effect of CECL is undertaken. Many of these and other commenters asserted that any transitional provision would be inadequate and preferred neutralizing the effect of CECL on regulatory capital ratios by either adjusting the CET1 capital calculation or revising the overall capital requirements. One commenter requested that the agencies expand the scope of credit loss allowances eligible for inclusion in a banking organization’s tier 2 capital to permit banking organizations to include post-acquisition allowances for PCD assets when PCD assets exceed a materiality threshold. Some commenters requested that the agencies increase or remove the current limit on allowances includable in tier 2 capital. Several commenters raised concerns with the proposed schedule for incorporation of CECL provisions into the stress testing cycle. One commenter requested that CECL’s implementation in the stress testing cycle align with the proposal’s three-year transition provision to allow time for industry standard practices to converge. Other commenters raised concerns and requested guidance in connection with how CECL interacts with regulatory capital and stress testing. Many of these commenters requested that the agencies undertake additional ‘‘cost-benefit’’ and impact studies to assess CECL’s effect on the regulatory capital of banking organizations of various sizes and under PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 4225 varying economic conditions over time. Numerous commenters urged the agencies to delay CECL’s implementation until additional impact studies have been completed, and to intervene on commenters’ behalf with the FASB to revise the accounting treatment of credit losses. III. Final Rule A. Changes to the Capital Rule To Reflect the Change in U.S. GAAP 1. Introduction of Adjusted Allowances for Credit Losses as a New Defined Term The agencies are adopting as final the proposal for the credit loss allowances that would have been eligible for inclusion in tier 2 capital, with one nonsubstantive change from the proposal with respect to terminology. The final rule includes a new term, adjusted allowances for credit losses (AACL), which replaces the term ACL, as used in the proposal. The agencies believe that the term AACL for regulatory capital purposes minimizes confusion, as its meaning is different from the term ACL used in applicable accounting standards. The term allowance for credit losses as used by the FASB in ASU 2016–13 applies to both financial assets and AFS debt securities. In contrast, the term ACL as used in the proposal for regulatory capital purposes excludes credit loss allowances on PCD assets and AFS debt securities. Consistent with the proposal and as described in the following sections, the AACL definition includes only those allowances that have been charged against earnings or retained earnings. Under the final rule, the term AACL, rather than ALLL, will apply to a banking organization that has adopted CECL. Consistent with the treatment of ALLL under the capital rule’s standardized approach, amounts of AACL are eligible for inclusion in a banking organization’s tier 2 capital up to 1.25 percent of the banking organization’s standardized total riskweighted assets (excluding its standardized market risk-weighted assets, if applicable). AACL covers a broader range of financial assets than ALLL under the incurred loss methodology. Under the standardized approach of the capital rule, ALLL includes valuation allowances that have been established through a charge against earnings to cover estimated credit losses on loans or other extensions of credit as determined in accordance with U.S. GAAP. Under CECL, credit loss allowances represent an accounting valuation account, measured as the difference between the financial assets’ amortized cost basis E:\FR\FM\14FER2.SGM 14FER2 4226 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations and the amount expected to be collected on the financial assets (i.e., lifetime credit losses). Thus, AACL includes allowances for expected credit losses on HTM debt securities and lessors’ net investments in leases that have been established to adjust these assets to amounts expected to be collected, as determined in accordance with U.S. GAAP. AACL also includes allowances for expected credit losses on off-balance sheet credit exposures not accounted for as insurance, as determined in accordance with U.S. GAAP. As described below, however, credit loss allowances related to AFS debt securities and PCD assets are not included in the definition of AACL. As with the definition of ALLL, AACL under the final rule also excludes allocated transfer risk reserves. 2. Definition of Carrying Value The agencies are adopting as final, without change from the proposal, the definition of carrying value. Under the final rule, carrying value means, with respect to an asset, the value of the asset on the balance sheet as determined in accordance with U.S. GAAP. Furthermore, carrying value under the final rule provides that, for all assets other than AFS debt securities and PCD assets, the carrying value is not reduced by any associated credit loss allowance. The agencies did not receive comments on the proposed treatment of AFS debt securities and, as discussed below, received one comment on the proposed treatment of PCD assets. Current accounting standards require a banking organization to make an individual assessment of each of its AFS debt securities and take a direct writedown for credit losses when such a security is other-than-temporarily impaired. The amount of the writedown is charged against earnings, which reduces CET1 capital and results in a reduction in the same amount to the carrying value of the AFS debt security. ASU 2016–13 revises the accounting for credit impairment of AFS debt securities by requiring banking organizations to determine whether a decline in fair value below an AFS debt security’s amortized cost resulted from a credit loss, and to record any such credit impairment through earnings with a corresponding allowance. Similar to the current regulatory treatment of credit-related losses for other-thantemporary impairment, under the final rule all credit losses recognized on AFS debt securities will correspondingly affect CET1 capital and reduce the carrying value of the AFS debt security. Since the carrying value of an AFS debt security is its fair value, which would VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 reflect any credit impairment, credit loss allowances for AFS debt securities required under the new accounting standard are not eligible for inclusion in a banking organization’s tier 2 capital. Under the new accounting standard, PCD assets are acquired individual financial assets (or acquired groups of financial assets with shared risk characteristics) that, as of the date of acquisition and as determined by an acquirer’s assessment, have experienced a more-than-insignificant deterioration in credit quality since origination. The new accounting standard will require a banking organization to estimate expected credit losses that are embedded in the purchase price of a PCD asset and recognize these amounts as an allowance as of the date of acquisition. As such, the initial allowance amount for a PCD asset recorded on a banking organization’s balance sheet will not be established through a charge to earnings. Including in tier 2 capital allowances that have not been charged against earnings would diminish the quality of regulatory capital. Post-acquisition increases in allowances for PCD assets will be established through a charge against earnings. Accordingly, the agencies are maintaining the requirement that valuation allowances be fully charged against earnings in order to be eligible for inclusion in tier 2 capital. The agencies also are clarifying that valuation allowances that are charged to retained earnings in accordance with U.S. GAAP (i.e., the allowances required at CECL adoption) are eligible for inclusion in tier 2 capital. The final rule, however, excludes PCD allowances from being included in tier 2 capital; rather, a banking organization calculates the carrying value of PCD assets net of allowances. This treatment of PCD assets, in effect, will reduce a banking organization’s standardized total riskweighted assets, similar to the proposed treatment for credit loss allowances for AFS debt securities. One commenter recommended that the agencies require or provide an option to allow banking organizations to use a bifurcated approach for the treatment of PCD assets whereby a banking organization could include post-acquisition allowances on PCD assets in tier 2 capital when the banking organization’s PCD balances exceed a materiality threshold. The commenter was concerned that the proposed approach could discourage banking organizations from acquiring distressed firms if the post-acquisition allowance were not includable in regulatory capital. As noted in the proposal, the agencies are concerned PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 that a bifurcated approach could create undue complexity and burden for banking organizations and believe that requiring banking organizations to calculate the carrying value of PCD assets net of allowances appropriately accounts for post-acquisition allowances in the calculation of regulatory capital. B. CECL Transition Provision In the preamble of the proposal, the agencies noted that some banking organizations have expressed concerns about the difficulty in capital planning due to the uncertainty about the economic environment at the time of CECL adoption. This is largely because CECL requires banking organizations to consider current and future expected economic conditions to estimate allowances and banking organizations will not understand these conditions until closer to their CECL adoption date. Therefore, it is possible that despite adequate planning to prepare for the implementation of CECL, unexpected economic conditions at the time of CECL adoption could result in higherthan-anticipated increases in allowances. To address these concerns, the agencies proposed to provide banking organizations with the option to phase in over a three-year period the day-one adverse effects of CECL on their regulatory capital ratios. Several commenters requested that the agencies extend the transition period from three years to five years or longer. In particular, commenters noted that effects of CECL on bank capital in the aggregate and for individual banks cannot be precisely estimated prior to actual adoption of CECL. Some commenters noted that a five-year transition would help to soften any adverse effects due to unresolved interpretive issues with respect to CECL implementation. According to one commenter, a five-year transition period would allow a bank to transition through the vast majority of the expected life of its loan portfolio. One commenter argued that a three-year transition period might not be sufficient for firms that enter a stress environment at the time of CECL implementation. One commenter supported the proposed three-year transition period. A few commenters asked the agencies to adopt a dynamic transition provision, whereby a banking organization could calculate and phase-in additional capital differences between CECL and the current incurred loss methodology (or a proxy for the incurred loss methodology) for any new credit loss allowances generated throughout the entire transition period, rather than just at initial adoption of CECL. Several E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations commenters requested that the agencies delay the implementation of CECL or neutralize the impact of CECL on regulatory capital until further study of the effect of CECL has been completed. The agencies note that ASU 2016–13 was issued in 2016 and becomes mandatory in 2020 at the earliest for banking organizations that are U.S. SEC filers, which provides banking organizations with at least a four year period to plan for CECL implementation. Most banking organizations are not required to adopt CECL until 2021 or 2022, according to the U.S. GAAP effective dates for ASU 2016–13. While the exact effects of CECL adoption may not be known currently, a banking organization will be able to better understand and estimate the macroeconomic factors that may affect the size of the banking organization’s one-time adjustment to CECL closer to its CECL adoption date. The agencies recognize that these estimates may change, and the three-year transition period may help mitigate capital volatility due to refinements in CECL allowance estimates that may be made as a banking organization approaches its CECL adoption date. The agencies continue to view the period of at least four years that banking organizations will have had to plan for the implementation of CECL, combined with the proposed three-year transition period, as a sufficient amount of time for a banking organization to adjust and adapt to any immediate adverse effects on regulatory capital ratios resulting from CECL adoption. Further, the agencies considered adopting a dynamic or ongoing transition approach, but believe, that relative to the straight-line approach, it would create unnecessary complexity and operational burden. Therefore, the agencies are finalizing the three-year transition period as proposed. As previously stated, many commenters requested that the agencies take action to ‘‘neutralize’’ the effect of CECL on regulatory capital on a more permanent basis. The agencies acknowledge that because changes in allowances may reduce retained earnings, which is a key component of CET1 capital, CECL implementation could affect regulatory capital levels at some banking organizations. In defining regulatory capital, the agencies have long sought to recognize the ability of capital to absorb losses and to support the ongoing operations of a banking organization. The agencies recognize commenters’ concerns with CECL and intend to closely monitor the effects of CECL on regulatory capital and bank VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 lending practices as the standard is implemented. 1. Election of the Optional CECL Transition Provision Under the final rule, a banking organization that experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the banking organization adopts CECL may elect to phase in the regulatory capital impact of adopting CECL over a three-year transition period (electing banking organization). An electing banking organization is required to begin applying the CECL transition provision as of the electing banking organization’s CECL adoption date. An electing banking organization must indicate in its Consolidated Reports of Condition and Income (Call Report) or Form FR Y–9C, as applicable, its election to use the CECL transition provision, by reporting the amounts in the affected line items of the regulatory capital schedule, adjusted for the transition provisions, beginning in the regulatory report for the quarter in which it first reports its credit loss allowances as measured under CECL. For example, an electing banking organization would adjust the amount of retained earnings it reports in Schedule RC–R of the Call Report or Schedule HC–R of the Form FR Y–9C to incorporate the transition provision. A banking organization that does not elect to use the CECL transition provision in the regulatory report for the quarter in which it first reports its credit loss allowances as measured under CECL will not be permitted to make an election in subsequent reporting periods and will be required to reflect the full effect of CECL in its regulatory capital ratios beginning as of the banking organization’s CECL adoption date. For example, a banking organization that adopts CECL as of January 1, 2020, and does not elect to use the CECL transition provision in its regulatory report as of March 31, 2020, must include the full effects of CECL adoption in its regulatory capital schedule as of March 31, 2020, and will not be permitted to use the CECL transition provision in any subsequent reporting period. A banking organization that initially elects to use the CECL transition provision in the final rule, but opts out of the transition provision in a subsequent reporting period, will not be permitted to resume using the transition provision at a later date within the three-year transition period. A banking organization may opt out of applying the transition provision by reflecting the full impact of CECL on regulatory PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 4227 capital in Schedule RC–R of the Call Report or Schedule HC–R of Form FR Y–9C, as applicable. A depository institution holding company subject to the Board’s capital rule and each of its subsidiary institutions is eligible to make a CECL transition provision election independent of one another. 2. Mechanics of the CECL Transition Provision Under the final rule, an electing banking organization must calculate transitional amounts for the following items: Retained earnings, temporary difference DTAs, and credit loss allowances eligible for inclusion in regulatory capital. For each of these items, the transitional amount is equal to the difference between the electing banking organization’s closing balance sheet amount for the fiscal year-end immediately prior to its adoption of CECL (pre-CECL amount) and its balance sheet amount as of the beginning of the fiscal year in which it adopts CECL (post-CECL amount). An electing banking organization must phase in the transitional amounts to its regulatory capital calculations over a three-year period beginning the first day of the fiscal year in which the electing banking organization adopts CECL. An electing banking organization’s ‘‘CECL transitional amount’’ is equal to the difference between its pre-CECL and post-CECL amounts of retained earnings (CECL transitional amount). An electing banking organization’s ‘‘DTA transitional amount’’ is equal to the difference between its pre-CECL and post-CECL amounts of temporary difference DTAs. An electing banking organization’s AACL transitional amount is equal to the difference between its pre-CECL amount of ALLL and its post-CECL amount of AACL (AACL transitional amount). Under the standardized approach, an electing banking organization must phase in over the three-year transition period its CECL transitional amount, DTA transitional amount, and AACL transitional amount. The electing banking organization also must phase in over the transition period the CECL transitional amount to its average total consolidated assets for purposes of calculating its tier 1 leverage ratio. Each transitional amount must be phased in over the transition period on a straightline basis. When calculating regulatory capital ratios during the first year of an electing banking organization’s CECL adoption date, the organization must phase in 25 percent of the transitional amounts. The electing banking organization would E:\FR\FM\14FER2.SGM 14FER2 4228 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations phase in an additional 25 percent of the transitional amounts over each of the next two years so that a banking organization would have phased in 75 percent of the day-one adverse effects of adopting CECL during year three. At the beginning of the fourth year, the banking organization would have completely reflected in regulatory capital the day-one effects of CECL. See Table 1 below for further details: TABLE 1—CECL TRANSITION AMOUNTS TO APPLY TO REGULATORY CAPITAL COMPONENTS Year 1 Increase retained earnings and average total consolidated assets by the following percentages of the CECL transitional amount ..................................................................................... Decrease temporary difference DTAs by the following percentages of the DTA transitional amount. Decrease AACL by the following percentages of the AACL transitional amount. For example, consider a hypothetical electing banking organization that has a CECL effective date of January 1, 2020, and a 21 percent tax rate. On the closing balance sheet date immediately prior to adopting CECL (i.e., December 31, 2019), the electing banking organization has $10 million in retained earnings and $1 million of ALLL. On the opening balance sheet date immediately after adopting CECL (i.e., January 1, 2020), the electing banking organization has $1.2 million of AACL. The electing banking organization would recognize the adoption of CECL by recording an increase to AACL (credit) of $200,000, with an offsetting increase in temporary difference DTAs of $42,000 (debit), and a reduction in beginning retained earnings of $158,000 (debit). For each of the quarterly reporting periods in year 1 of the transition period (i.e., 2020), the electing banking organization would increase both retained earnings and 75% Year 2 Year 3 50% 25% average total consolidated assets by $118,500 ($158,000 × 75 percent), decrease temporary difference DTAs by $31,500 ($42,000 × 75 percent), and decrease AACL by $150,000 ($200,000 × 75 percent) for purposes of calculating its regulatory capital ratios. The remainder of the transitional amounts will be transitioned into regulatory capital according to the schedule provided in Table 2. TABLE 2—EXAMPLE OF A CECL TRANSITION PROVISION SCHEDULE Transitional amounts In thousands Transitional amounts applicable during each year of the transition period Column B Column C Column D Year 1 at 75% Year 2 at 50% Year 3 at 25% $118.50 31.50 150 $79 21 100 $39.50 10.50 50 Column A Increase retained earnings and average total consolidated assets by the CECL transitional amount ............................................................................ Decrease temporary difference DTAs by the DTA transitional amount .......... Decrease AACL by the ACL transitional amount ............................................ The result of the CECL transition provision for an electing banking organization is to phase in the effect of the adoption of CECL in its regulatory capital ratios in a uniform manner. The phase-in of the CECL transitional amount to retained earnings will mitigate the decrease in an electing banking organization’s CET1 capital resulting from CECL adoption, and would increase the levels at which the capital rule’s CET1 capital deduction thresholds would be triggered. The DTA transitional amount phases in the amount of an electing banking organization’s temporary difference DTAs subject to the CET1 capital deduction thresholds and the amount of temporary difference DTAs included in risk-weighted assets. The AACL transitional amount phases in the amount of AACL that an electing banking organization may include in its tier 2 capital up to the limit of 1.25 percent of its standardized total riskweighted assets (excluding its VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 $158 42 200 standardized market risk-weighted assets, if applicable). Finally, for purposes of an electing banking organization’s tier 1 leverage ratio calculation, the addition of the CECL transitional amount to average total consolidated assets offsets the immediate decrease that would otherwise occur as a result of the adjustments to credit loss allowances and temporary difference DTAs resulting from the adoption of CECL. Notwithstanding the CECL transition provision, all other aspects of the capital rule will continue to apply. Thus, all regulatory capital adjustments and deductions will continue to apply and an electing banking organization will continue to be limited in the amount of credit loss allowances that it could include in its tier 2 capital.19 19 12 CFR 3.10(c)(3)(ii)(B), 12 CFR 3.20(d)(3) (OCC); 12 CFR 217.10(c)(3)(ii)(B), 12 CFR 217.20(d)(3) (Board); 12 CFR 324.10(c)(3)(ii)(B), 12 CFR 324.20(d)(3) (FDIC). PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 3. Business Combinations Under the proposal, during the period in which an electing banking organization is using the CECL transition provision, if the electing banking organization acquired another banking organization through a business combination (as determined under U.S. GAAP), the electing banking organization would have been able to continue to make use of its transitional amounts based on its calculation as of the date of its adoption of CECL. Business combinations would have covered mergers, acquisitions, and transactions in which two existing unrelated entities combine into a newly created third entity. One commenter requested that the agencies allow transitional amounts of an acquired electing banking organization to flow through to the resulting banking organization. The agencies do not believe that such a treatment is appropriate, as any assets acquired and liabilities assumed will be E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations measured at fair value as of the acquisition date under U.S. GAAP, and therefore the capital relief is no longer relevant for the acquired banking organizations. Thus, under the final rule, any transitional amounts of an acquired electing banking organization will not be eligible for inclusion in the calculation of the regulatory capital ratios of the resulting banking organization.20 4. Supervisory Oversight For purposes of determining whether an electing banking organization is in compliance with its regulatory capital requirements (including capital buffer and prompt corrective action (PCA) requirements), the agencies will use the electing banking organization’s regulatory capital ratios as adjusted by the CECL transition provision. Through the supervisory process, the agencies will continue to examine banking organizations’ credit loss estimates and allowance balances regardless of whether the banking organization has elected to use the CECL transition provision. In addition, the agencies may examine whether electing banking organizations will have adequate amounts of capital at the expiration of their CECL transition provision period. C. Additional Requirements for Advanced Approaches Banking Organizations Under the capital rule, an advanced approaches banking organization 21 that has completed the parallel run process must include in its advancedapproaches-adjusted total capital any amount of eligible credit reserves that exceeds its regulatory expected credit losses to the extent that the excess reserve amount does not exceed 0.6 percent of the banking organization’s credit risk-weighted assets.22 Consistent with the proposal, the agencies are revising the definition of eligible credit reserves to align with the definition of AACL in the final rule. Under the final rule, for an advanced approaches banking organization that has completed the parallel run process and that has adopted CECL, eligible credit reserves includes all general allowances that have been established through a charge against earnings or retained earnings to cover expected credit losses associated 4229 with on- or off-balance sheet wholesale and retail exposures, including AACL associated with such exposures. Similar to the current definition of eligible credit reserves, the definition of eligible credit reserves applicable to banking organizations that have adopted CECL excludes allocated transfer risk reserves established pursuant to 12 U.S.C. 3904. In addition, the revised eligible credit reserves definition excludes expected credit losses on PCD assets and expected credit losses on AFS debt securities, and other specific reserves created against recognized losses. The definition of eligible credit reserves remains unchanged for an advanced approaches banking organization that has not adopted CECL. For purposes of the supplementary leverage ratio (SLR), which is applicable to all advanced approaches banking organizations, the final rule maintains the current definition of total leverage exposure. Thus, total leverage exposure continues to include, among other items, the balance sheet carrying value of such a banking organization’s onbalance sheet assets less amounts deducted from tier 1 capital. TABLE 3—CECL TRANSITION AMOUNTS FOR ADVANCED APPROACHES BANKING ORGANIZATIONS Year 1 Increase total leverage exposure for SLR by the following percentages of the CECL transitional amount ............................................................................................................................ Decrease eligible credit reserves by the following percentages of the eligible credit reserves transitional amount. 75% Year 2 50% Year 3 25% An advanced approaches banking organization that has completed the parallel run process is required to deduct the amount of expected credit losses that exceeds its eligible credit reserves (ECR shortfall) from its CET1 capital. Due to this requirement, an advanced approaches banking organization’s CET1 capital immediately after CECL adoption may be greater than its CET1 capital immediately before CECL adoption.23 This is because, for a banking organization with an ECR shortfall, an increase in allowances resulting from CECL adoption can have a dual impact on CET1 capital: (1) A reduction in retained earnings (partially offset by DTAs) that may be less than (2) a concurrent reduction in the ECR shortfall amount because while the CET1 capital reduction is net of DTAs, the reduction in ECR shortfall is not net of DTAs. The agencies were concerned that the use of the CECL transition provision could provide an undue benefit to a banking organization that has an ECR shortfall prior to its adoption of CECL and could undermine an objective of the CECL transition provision to provide relief to banking organizations that experience an immediate adverse impact to regulatory capital as a result of CECL adoption. The agencies received one comment that supported this aspect of the proposal, for the stated reasons above. The final rule, therefore, limits the CECL transitional amount that such an electing advanced approaches banking organization can include in retained earnings. Under the final rule and consistent with the proposal, an electing advanced approaches banking organization that (1) has completed the parallel run process, (2) has an ECR shortfall immediately prior to the adoption of CECL, and (3) would have an increase in CET1 capital as of the beginning of the fiscal year in which it adopts CECL after including the first year portion of the CECL transitional amount, is required to decrease its CECL transitional amount by its DTA transitional amount.24 20 For combinations of banking organizations under common control the transitional amounts of each banking organization could be combined in the calculation of the regulatory capital ratios of the resulting banking organization. 21 See footnote 13. 22 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR 217.10(c)(3)(ii) (Board); and 12 CFR 324.10(c)(3)(ii) (FDIC). 23 See 12 CFR 3.121(d) (OCC); 12 CFR 217.121(d) (Board); and 12 CFR 324.121(d) (FDIC). 24 For example, if a banking organization has completed the parallel run process, has an ECR shortfall immediately prior to the adoption of CECL, would have an increase in CET1 capital as of the beginning of the fiscal year in which it adopts CECL after including the first year portion of the CECL transitional amount, and, upon the adoption of CECL, records an increase in AACL (credit) of $200,000, with an offsetting increase in temporary difference DTAs of $42,000 (debit), and a reduction in beginning retained earnings of $158,000 (debit), then that banking organization would have a CECL transitional amount of $116,000 ($158,000¥$42,000), and would apply $87,000 in year 1, $58,000 in year 2, $29,000 in year 3 of the transition period. VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2 4230 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations D. Disclosures and Regulatory Reporting One commenter urged the agencies to consider requiring banking organizations to disclose the full effect of CECL. The agencies recognize that increased disclosures help to provide users of financial reports with additional information, but doing so can increase burden for banking organizations. The agencies have proposed revisions to certain regulatory reporting forms to reflect the changes in U.S. GAAP provided by ASU 2016–13 in a separate proposal.25 The proposed revisions would specify how electing banking organizations report their transitional amounts for the affected line items in Schedule RC–R of the Call Report and Schedule HC–R of the FR Y– 9C.26 In addition, the agencies intend to update instructions for certain other reporting forms, including the FFIEC 101, to reflect the three-year CECL transition period. In addition, under the final rule, banking organizations subject to the disclosure requirements in section 63 of the capital rule (i.e., banking organizations with total consolidated assets of $50 billion or more) would be required to update their disclosures to reflect the adoption of CECL. Such banking organizations would be required to disclose AACL instead of ALLL after CECL adoption. For advanced approaches banking organizations, the final rule makes similar revisions to Tables 2, 3, and 5 in section 173 27 of the capital rule to reflect the adoption of CECL. In addition, the final rule revises those tables requiring electing advanced approaches banking organizations to disclose two sets of regulatory capital ratios. One set would reflect the banking organization’s capital ratios with the CECL transition provision and the other set would reflect the banking 25 83 FR 49160 (September 28, 2018). November 20, 2018, the agencies issued a notice of proposed rulemaking to implement Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the proposal, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, meet riskbased qualifying criteria, and have a community bank leverage ratio (as defined in the proposal) of greater than 9 percent would be eligible to opt into a community bank leverage ratio (CBLR) framework. Banking organizations that use the CBLR framework would no longer be required to complete the current Schedule RC–R of the Call Report or Schedule HC–R of the FR Y–9C, as applicable. The agencies anticipate issuing for public comment a proposed alternative capital reporting schedule for such banking organizations. 27 12 CFR 3.173 (OCC); 12 CFR 217.173 (Board); 12 CFR 324.173 (FDIC). 26 On VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 organization’s capital ratios on a fully phased-in basis. E. Conforming Changes to Other Agency Regulations 1. OCC Regulations In addition to the capital rule, seven provisions in other OCC regulations refer to ALLL, as defined in 12 CFR part 3, in calculating various statutory or regulatory limits. Specifically, ALLL is used in calculating limits on holdings of certain investment securities (12 CFR part 1); limits on ownership of bankers’ bank stock (12 CFR 5.20); limits on investments in bank premises (12 CFR 5.37); limits on leasing of personal property (12 CFR 23.4); limits on certain community development investments (12 CFR 24.4); lending limits (12 CFR part 32); and, limits on improvements to other real estate owned (12 CFR part 34, subpart E). The OCC has revised the calculations used in six of those sections that currently reference ALLL to reference AACL, once a banking organization has adopted the FASB standard. The revisions ensure that banking organizations will not experience a material decrease in any of the affected limits due to the adoption of CECL. With respect to limits on improvements to other real estate owned in 12 CFR part 34, subpart E, the OCC is withdrawing the proposed revision in anticipation of making comprehensive revisions to that subpart in the near future. The OCC also made conforming edits to the terminology used in the stress testing regulation at 12 CFR part 46 to incorporate the new CECL methodology. Some commenters requested that the OCC mirror the Board and FDIC in adopting detailed CECL-specific provisions and effective dates in part 46. The OCC currently addresses these details through instructions to the stress tests and will continue to do so through amending the instructions instead of through rulemaking. 2. Board Regulations Certain Board regulations reflect the current practice of banking organizations establishing an ALLL under the incurred loss methodology to cover estimated credit losses on loans, lease financing receivables, or other extensions of credit. As discussed above, banking organizations that adopt CECL will hold AACL to cover expected credit losses on a broader array of financial assets than covered by the ALLL. As a result, the final rule makes conforming changes to those other regulations. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 Specifically, the final rule amends the definition of ‘‘capital stock and surplus’’ in the Board’s Regulation H, 12 CFR part 208, to include the balance of a member bank’s AACL. Similarly, the final rule incorporates ‘‘allowance for credit losses’’ in the definition of ‘‘capital stock and surplus’’ in the Board’s Regulation K, 12 CFR part 211; Regulation W, 12 CFR part 223; and Regulation Y, 12 CFR part 225. A related change will be made to the definition of unimpaired capital and unimpaired surplus in the Board’s Regulation O, 12 CFR part 215. The final rule makes a similar change to the Board’s Regulation K relating to the establishment of allocated transfer risk reserve (ATRR). Specifically, the final rule replaces, for CECL adopters, all references to ALLL, in the section relating to the accounting treatment of ATRR, with AACL. The final rule incorporates technical amendments to section 225.127 of the Board’s Regulation Y to provide corrected reference citations to sections of Regulation Y that have been revised and renumbered. Finally, the final rule amends the supervisory stress testing and companyrun stress testing rules in the Board’s Regulation YY, 12 CFR part 252, to address the changes made in U.S. GAAP following the issuance of ASU 2016– 13.28 Several commenters requested that the Board delay incorporation of CECL into the Comprehensive Capital Analysis and Review (CCAR) given CECL’s operational and governance challenges. In particular, some commenters requested a delay for incorporating CECL until the 2021 stress testing cycle, while one commenter requested a delay until the year following a banking organization’s adoption of CECL and another commenter requested a delay until an industry standard practice regarding incorporating CECL into CCAR emerges. One commenter requested that the Board phase in CECL into CCAR over three years, consistent with the proposed transition provision. The Board notes that the proposal did not address the incorporation of CECL into CCAR and instead addressed the incorporation of CECL into the Board’s stress testing rules. As a result, the Board is addressing the comments in the context of incorporation of CECL in its stress testing rules. While CCAR and the capital plan rule are outside of the scope of this rulemaking, the Board is carefully considering the effect of CECL on key aspects of CCAR, including its assessment of a firm’s post-stress capital 28 See E:\FR\FM\14FER2.SGM 12 CFR part 252, subparts B, E, and F. 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations adequacy and its supervision of a firm’s internal capital planning practices. The Board will look to provide more information on the intersection of CECL and CCAR. The Board acknowledges that incorporating CECL on a forwardlooking basis in the Board’s supervisory stress testing and company-run stress testing rules involves additional challenges apart from those involved in financial reporting. However, in order to address the purpose of the stress testing rules—to assess whether banking organizations have sufficient capital to absorb losses as a result of adverse economic conditions—the Board expects that banking organizations implementing CECL for financial reporting will also reflect CECL in their stress testing processes starting in the same year. Otherwise, stress test projections may not reflect how the banking organizations’ balance sheets and regulatory capital ratios would evolve during stressful conditions. The Board also believes an extended phasein of CECL into the stress test rules would introduce undue complexity in the requirements. Such a transition would require estimating regulatory capital ratios under both the incurred loss method and CECL for three annual stress testing exercises. For these reasons, the Board is finalizing the initial application of CECL in stress testing as proposed. As such, under the final rule, a banking organization that has adopted CECL will be required to include its provision for credit losses beginning in the 2020 stress test cycle, which would include provisions calculated under ASU 2016– 13, instead of its provision for loan and lease losses, in its stress testing methodologies and data and information 4231 required to be submitted to the Board and that the disclosure of the results of those stress tests includes estimates of those provisions. To promote comparability of stress test results across firms, for the 2018 and 2019 stress test cycles, a banking organization will continue to use its provision for loan and lease losses, as would be calculated under the incurred loss methodology, even if the firm adopts CECL in 2019. Finally, under the final rule, a banking organization that does not adopt CECL until 2021 will not be required to include its provision for credit losses for these purposes until the 2021 stress test cycle. The following table describes the stress test cycles in which a banking organization will be required to use its provision for credit losses instead of the provision for loan and lease losses, based on the varying dates of adoption of ASU 2016–13. TABLE 4—SUMMARY OF USE OF PROVISIONS IN 2019–2021 STRESS TEST CYCLES Year of adoption of ASU 2016–13 2019 Stress test cycle 2020 Stress test cycle 2019 ................................ 2020 ................................ 2021 ................................ Provision for loan and lease losses .. Provision for loan and lease losses .. Provision for loan and lease losses .. Provision for credit losses ................. Provision for credit losses ................. Provision for loan and lease losses .. In addition, beginning in the 2020 stress test cycle, a banking organization that has adopted CECL will be required under the final rule to incorporate the effects of the maintenance of AACL when estimating the impact on pro forma regulatory capital levels and pro forma capital ratios. 3. FDIC Regulations The final rule makes conforming amendments to references to provisions or allowances for loan and lease losses in the FDIC’s regulations. Specifically, the final rule would replace, for CECL adopters, all references to ALLL with AACL (as applicable) in the FDIC’s capital rule codified at 12 CFR part 324, including in the definitions of ‘‘identified losses’’ and ‘‘standardized total risk-weighted assets.’’ The final rule also makes conforming changes to the FDIC regulations in 12 CFR parts 327 and 347 by replacing references to ALLL with allowance for credit losses (as determined in accordance with U.S. GAAP). The final rule also makes conforming changes to 12 CFR part 390 by adding provision for credit losses. Finally, consistent with the changes to the Board’s stress testing rules, the final rule makes similar conforming changes to the FDIC’s stress testing rules codified at 12 CFR part 325. VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 IV. Long Term Considerations With CECL Several commenters recommended that the agencies neutralize the effects of CECL in the capital rule as an alternative to the proposed phase-in approach. Several commenters requested that the agencies study CECL’s effect on regulatory capital, including CECL’s effects over the economic cycle; review the regulatory capital requirements with respect to allowances; and conduct cost-benefit analysis of CECL’s implementation on small and medium-sized banking organizations. One commenter requested that the agencies ask the FASB to delay implementation of CECL until a study is conducted on CECL’s effects on the overall stability of the banking sector and on the availability, accessibility, and affordability of credit. One commenter asked the agencies to engage with the FASB to make changes to CECL to minimize its effects on regulatory capital. Another commenter asked the agencies to consider issuing interpretative industry guidelines that will help narrow the range of potential practices. Additional comments were received on the interaction between CECL and stress testing. One commenter asked that any decision the Board makes regarding implementation of CECL to PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 2021 Stress test cycle Provision for credit losses. Provision for credit losses. Provision for credit losses. depository institution holding companies that are engaged in significant insurance activities reflect the Building Block Approach to capital. The agencies recognize commenters’ concerns about CECL’s effects on regulatory capital. The agencies are committed to closely monitoring the effects of CECL on regulatory capital and bank lending practices. This ongoing monitoring will include the review of data provided by banking organizations, as well as information observed from banking organizations’ parallel runs before their adoption of CECL and their implementation of CECL. V. Regulatory Analyses A. Paperwork Reduction Act Certain provisions of the final rule contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3521) (PRA). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The agencies reviewed the final rule and determined that the final rule revises certain E:\FR\FM\14FER2.SGM 14FER2 4232 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations disclosure and reporting requirements that have been previously cleared by the OMB under various control numbers. The agencies will revise and extend these information collections for three years. The information collections for the disclosure requirements contained in the final rulemaking have been submitted by the OCC and FDIC to OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB’s implementing regulations (5 CFR part 1320). The Board reviewed the final rule under the authority delegated to the Board by OMB. Disclosure Burden—Advanced Approaches Banking Organizations Current Actions Section 173 of the capital rule requires that advanced approaches banking organizations publicly disclose capital-related information as provided in a series of 13 tables. For advanced approaches banking organizations, the agencies made revisions to Tables 2, 3, and 5 in section 173 of the capital rule to reflect the adoption of CECL. In addition, the agencies made revisions to those tables for electing advanced approaches banking organizations to disclose two sets of regulatory capital ratios. One set reflects such banking organization’s capital ratios with the CECL transition provision and the other set reflects the banking organization’s capital ratios on a fully phased-in basis. This aspect of the final rule affects the below-listed information collections. The changes in the disclosure requirements to Tables 2, 3, and 5 in section 173 of the capital rule result in an increase in the average hours per response per agency of 48 hours for the initial setup burden. In addition, the changes in the disclosure requirements to Tables 2, 3, and 5 in section 173 of the capital rule result in an increase in the average hours per response per agency of 6 hours for ongoing (quarterly) burden.29 Revision, With Extension, of the Following Information Collections OCC Title of Information Collection: RiskBased Capital Standards: Advanced Capital Adequacy Framework. 29 In an effort to provide transparency, the total cumulative burden for each agency is shown. In addition, as stated in the Notice of Proposed Rulemaking, Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, 82 FR 49984 (October 27, 2017), in order to be consistent across the agencies, the agencies are also applying a conforming methodology for calculating the burden estimates. VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 Frequency: Quarterly, annual. Affected Public: Businesses or other for-profit. Respondents: National banks, state member banks, state nonmember banks, and state and federal savings associations. OMB control number: 1557–0318. Estimated number of respondents: 1,365 (of which 18 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios Recordkeeping (Ongoing)—16. Standardized Approach Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. Disclosure (Ongoing quarterly)— 131.25. Advanced Approach Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—328. Disclosure (Ongoing)—5.78. Disclosure (Ongoing quarterly)—41. Revisions estimated annual burden: 432 hours. Estimated annual burden hours: 1,088 hours initial setup, 66,017 hours for ongoing. Board Title of Information Collection: Recordkeeping and Disclosure Requirements Associated with Regulation Q. Frequency: Quarterly, annual. Affected Public: Businesses or other for-profit. Respondents: State member banks (SMBs), bank holding companies (BHCs), U.S. intermediate holding companies (IHCs), savings and loan holding companies (SLHCs), and global systemically important bank holding companies (GSIBs). Legal authorization and confidentiality: This information collection is authorized by section 38(o) of the Federal Deposit Insurance Act (12 U.S.C. 1831o(c)), section 908 of the International Lending Supervision Act of 1983 (12 U.S.C. 3907(a)(1)), section 9(6) of the Federal Reserve Act (12 U.S.C. 324), and section 5(c) of the Bank Holding Company Act (12 U.S.C. 1844(c)). The obligation to respond to this information collection is mandatory. If a respondent considers the information to be trade secrets and/ or privileged such information could be withheld from the public under the authority of the Freedom of Information Act (5 U.S.C. 552(b)(4)). Additionally, to PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 the extent that such information may be contained in an examination report such information could also be withheld from the public (5 U.S.C. 552(b)(8)). Agency form number: FR Q. OMB control number: 7100–0313. Estimated number of respondents: 1,431 (of which 17 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios Recordkeeping (Ongoing)—16. Standardized Approach Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. Disclosure (Ongoing quarterly)— 131.25. Advanced Approach Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—328. Disclosure (Ongoing)—5.78. Disclosure (Ongoing quarterly)—41. Disclosure (Table 13 quarterly)—5. Risk-based Capital Surcharge for GSIBs Recordkeeping (Ongoing)—0.5. Revisions estimated annual burden: 456 hours. Estimated annual burden hours: 1,136 hours initial setup, 78,591 hours for ongoing. FDIC Title of Information Collection: Regulatory Capital Rule. Frequency: Quarterly, annual. Affected Public: Businesses or other for-profit. Respondents: State nonmember banks, state savings associations, and certain subsidiaries of those entities. OMB control number: 3064–0153. Estimated number of respondents: 3,575 (of which 2 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios Recordkeeping (Ongoing)—16. Standardized Approach Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. Disclosure (Ongoing quarterly)— 131.25. Advanced Approach Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—328. Disclosure (Ongoing)—5.78. E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations Disclosure (Ongoing quarterly)—41. Revisions estimated annual burden: 96 hours. Estimated annual burden hours: 1,136 hours initial setup, 130,806 hours for ongoing. Reporting Burden—FFIEC and Board Forms Current Actions The agencies also plan to make changes to certain FFIEC and Board reporting forms and/or their related instructions as a result of the issuance of ASU 2016–13. In particular, the forms and/or related instructions for the following FFIEC reports could be affected: Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041, and FFIEC 051; OMB No. 1557–0081, 7100–0036, and 3064–0052), Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002; OMB No. 7100–0032), Report of Assets and Liabilities of a Non-U.S. Branch that is Managed or Controlled by a U.S. Branch or Agency of a Foreign (NonU.S.) Bank (FFIEC 002S; OMB No. 7100–0032), Foreign Branch Report of Condition (FFIEC 030; OMB No. 1557– 0099, 7100–0071, and 3064–0011), Abbreviated Foreign Branch Report of Condition (FFIEC 030S; OMB No. 1557– 0099, 7100–0071, and 3064–0011), and Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101; OMB No. 1557–0239, 7100–0319, and 3064–0159). As a result of the proposal, a separate 60-day Federal Register notice 30 addressed these changes to the FFIEC forms and/or instructions. These changes will also be addressed in separate 30-day Federal Register notice. The forms and/or related instructions for the following Board reports could be affected: Financial Statements of Foreign Subsidiaries of U.S. Banking Organizations (FR 2314; OMB No. 7100– 0073), Domestic Finance Company Report of Consolidated Assets and Liabilities (FR 2248; OMB No. 7100– 0005), Weekly Report of Selected Assets and Liabilities of Domestically Chartered Commercial Banks and U.S. Branches and Agencies of Foreign Banks (FR 2644; OMB No. 7100–0075), Consolidated Report of Condition and Income for Edge and Agreement Corporations (FR 2886b; OMB No. 7100–0086), Financial Statements of U.S. Nonbank Subsidiaries Held by Foreign Banking Organizations (FR Y– 7N; 7100–0125), Consolidated Financial 30 83 FR 49160 (September 28, 2018). VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 Statements for Holding Companies (FR Y–9C; OMB No. 7100–0128), Parent Company Only Financial Statements for Large Holding Companies (FR Y–9LP; OMB No. 7100–0128), Parent Company Only Financial Statements for Small Holding Companies (FR Y–9SP; OMB No. 7100–0128), Financial Statements of U.S. Nonbank Subsidiaries of U.S. Holding Companies (FR Y–11; OMB No. 7100–0244), Capital Assessments and Stress Testing (FR Y–14; OMB No. 7100–0341), and Banking Organization Systemic Risk Report (FR Y–15; OMB No. 7100- 0352). These changes to the FFIEC forms and/or instructions as well as the Board forms and/or instructions would be addressed in separate Federal Register notices. B. Regulatory Flexibility Act OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), requires an agency, in connection with a final rule, to prepare an initial regulatory flexibility analysis describing the impact of the rule on small entities (defined by the Small Business Administration (SBA) for purposes of the RFA to include commercial banks and savings institutions with total assets of $550 million or less and trust companies with total revenue of $38.5 million or less) or to certify that the final rule would not have a significant economic impact on a substantial number of small entities. As of December 31, 2017, the OCC supervised 886 small entities. The final rule would apply to all OCC supervised entities, and thus potentially affects a substantial number of small entities. To determine whether a final rule would have a significant effect on those small entities, the OCC considers whether the economic impact associated with the final rule is greater than or equal to either 5 percent of a small entity’s total annual salaries and benefits or 2.5 percent of a small entity’s total noninterest expense. The OCC estimates the final rule would not generate any costs for affected small entities. The final rule may generate a benefit for those small entities that elect the transition. The benefit ranges between approximately $4,800 to $30,000 per electing small entity, depending on the year the entity adopts the transition and the amount of increase in the entity’s loan loss reserves. This estimate is based on the potential savings to small entities from not needing to raise additional capital related to CECL implementation due to the regulatory capital transition. The estimated benefit is not significant in relation to the measures described above. Therefore, the OCC certifies that the final rule would not have a PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 4233 significant economic impact on a substantial number of OCC-supervised small entities. Board: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., generally requires that, in connection with a proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis (IRFA).31 The Board solicited public comment on this proposal in a notice of proposed rulemaking 32 and has since considered the potential impact of this proposal on small entities in accordance with section 604 of the RFA. Based on the Board’s analysis, and for the reasons stated below, the Board believes the final rule will not have a significant economic impact on a substantial number of small entities. The RFA requires an agency to prepare a final regulatory flexibility analysis (FRFA) unless the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities.33 The FRFA must contain: (1) A statement of the need for, and objectives of, the rule; (2) a statement of the significant issues raised by the public comments in response to the IRFA, a statement of the agency’s assessment of such issues, and a statement of any changes made in the proposed rule as a result of such comments; (3) the response of the agency to any comments filed by the Chief Counsel for Advocacy of the Small Business Administration in response to the proposed rule, and a detailed statement of any changes made to the proposed rule in the final rule as a result of the comments; (4) a description of an estimate of the number of small entities to which the rule will apply or an explanation of why no such estimate is available; (5) a description of the projected reporting, recordkeeping and other compliance requirements of the rule, including an estimate of the classes of small entities which will be subject to the requirement and the type of professional skills necessary for preparation of the report or record; and (6) a description of the steps the agency has taken to minimize the significant economic impact on small entities, including a statement for selecting or rejecting the other significant 31 See 5 U.S.C. 603, 604 and 605. FR 22312 (May 14, 2018). 33 Under regulations issued by the Small Business Administration, a small entity includes a depository institution, bank holding company, or savings and loan holding company with total assets of $550 million or less and trust companies with total assets of $38.5 million or less. As of December 31, 2017, there were approximately 3,384 small bank holding companies, 230 small savings and loan holding companies, and 559 small state member banks. 32 83 E:\FR\FM\14FER2.SGM 14FER2 4234 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations alternatives to the rule considered by the agency. Statement of the need for, and objectives of, the final rule. As discussed in detail above, the final rule identifies which credit loss allowances under ASU 2016–13 are eligible for inclusion in regulatory capital and provides banking organizations an optional three-year transition period to phase in the immediate effect on regulatory capital that may result from adoption of this accounting standard (ASU 2016–13). The final rule also makes conforming amendments to other regulations. The Board has authority under the International Lending Supervision Act (ILSA) 34 and the PCA provisions of the Federal Deposit Insurance Act 35 to establish regulatory capital requirements for the institutions it regulates. For example, ILSA directs each Federal banking agency to cause banking institutions to achieve and maintain adequate capital by establishing minimum capital requirements as well as by other means that the agency deems appropriate.36 The PCA provisions of the Federal Deposit Insurance Act direct each Federal banking agency to specify, for each relevant capital measure, the level at which an insured depository institution is well capitalized, adequately capitalized, undercapitalized, and significantly undercapitalized.37 In addition, the Board has authority to establish regulatory capital standards for bank holding companies under ILSA 38 and the Bank Holding Company Act 39 and for savings and loan holding companies under the Home Owners Loan Act.40 All banking organizations will be required to adopt ASU 2016–13, which will likely result in an increase in credit loss allowances. An increase in a banking organization’s credit loss allowances will reduce the firm’s retained earnings and therefore its CET1 capital. The final rule identifies those credit loss allowances under ASU 2016– 13 that are eligible for inclusion in regulatory capital. Further, the final rule introduces a three-year transition period, which allows a banking organization to phase in the immediate impact of adoption of ASU 2016–13. During the transition period, a banking organization that elects to use the phase34 12 U.S.C. 3901–3911. U.S.C. 1831o. 36 12 U.S.C. 3907(a)(1). 37 12 U.S.C. 1831o(c)(2). 38 See 12 U.S.C. 3907. 39 See 12 U.S.C. 1844. 40 See 12 U.S.C. 1467a(g)(1). 35 12 VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 in will report higher capital than it otherwise would under the current capital rule. The final rule also makes conforming amendments to certain of the Board’s other regulations. In particular, certain other regulations of the Board include a definition of ‘‘capital stock and surplus,’’ which reflect the current practice of banking organizations establishing ALLL to cover estimated credit losses on loans, lease financing receivables, or other extensions of credit. The final rule allows banking organizations that are subject to these regulations to also include in the definition of ‘‘capital stock and surplus’’ those credit loss allowances under ASU 2016–13 that would be eligible for inclusion in regulatory capital. A discussion of the significant issues raised by public comments in response to the IRFA, and the Board’s response to any comments filed by the Chief Counsel for Advocacy of the Small Business Administration in response to the proposed rule. The Board did not receive any comments on the IRFA that it published in connection with the proposal. In addition, the Chief Counsel for Advocacy of the Small Business Administration did not file any comments in response to the proposal. Accordingly, no changes were made to the proposal as a result of RFA-related comments. Description and estimate of the number of small entities to which the rule will apply. Most aspects of the final rule apply to all state member banks, as well as generally all bank holding companies and savings and loan holding companies that are subject to the Board’s capital rule. As of December 31, 2017, there were approximately 3,384 bank holding companies, 230 savings and loan holding companies, and 559 state member banks that qualified as small entities. The final rule revises the Board’s capital rule, which applies to bank holding companies and savings and loan holding companies with greater than $1 billion in total assets. Therefore, virtually all bank holding companies and savings and loan holding companies that would be subject to the final rule do not qualify as small entities. The final rule will apply to state member banks that qualify as small entities. Description of the projected reporting, recordkeeping and other compliance requirements of the rule. The final rule will impose some small recordkeeping, reporting, and compliance requirements on Boardregulated institutions. Specifically, the PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 final rule would change certain disclosure requirements for advancedapproaches institutions, which include banking organizations with consolidated assets of at least $250 billion or consolidated on-balance sheet foreign exposures of at least $10 billion or if the banking organization. These requirements would not apply to small entities, and there are no other expected compliance requirements associated with the final rule. The agencies are separately updating the relevant reporting forms. Description of the steps taken to minimize any significant economic impact on small entities. The Board does not believe that the final rule will impose significant costs on small entities. With respect to Boardregulated institutions that do qualify as small entities, the final rule’s revisions to the Board’s capital rule should allow institutions to include additional credit loss allowances into regulatory capital than they otherwise would be able to under the current capital rule. However, there is uncertainty as to the amount of the benefit that institutions will accrue, given that the impact of CECL will depend on the economic environment at the time a firm adopts CECL. The Board does not believe there are significant alternatives to the final rule that have less economic impact on small entities but the Board is committed to closely monitoring the effects of CECL on regulatory capital and bank lending practices. In addition, the Board does not believe that the final rule duplicates, overlaps, or conflicts with any other Federal Rules. FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., generally requires an agency, in connection with a final rule, to prepare and make available a final regulatory flexibility analysis that describes the impact of a final rule on small entities.41 However, a regulatory flexibility analysis is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) has defined ‘‘small entities’’ to include banking organizations with total assets of less than or equal to $550 million who are independently owned and operated or owned by a holding company with less than $550 million in total assets.42 41 5 U.S.C. 601 et seq. SBA defines a small banking organization as having $550 million or less in assets, where ‘‘a financial institution’s assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ See 13 CFR 121.201 (as amended, effective December 2, 42 The E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations Description of Need and Policy Objectives Response to Comments Regarding the Regulatory Flexibility Act In June 2016, the FASB issued ASU 2016–13, which revises the accounting for credit losses under U.S. GAAP. CECL differs from the incurred loss methodology currently implemented by institutions in several key respects. CECL requires banking organizations to recognize lifetime expected credit losses for financial assets measured at amortized cost, not just those credit losses that are probable of having been incurred as of the reporting date. In addition to maintaining the current requirement for banking organizations to consider past events and current conditions, CECL requires the incorporation of reasonable and supportable forecasts in developing an estimate of lifetime expected credit losses. Upon adoption of CECL, a banking organization will record a one-time adjustment to its allowance for credit losses as of the beginning of its fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances required under the incurred loss methodology and the amount of credit loss allowances required under the CECL methodology. Changes to retained earnings, DTAs, and credit loss allowances affect a banking organization’s calculation of regulatory capital.43 To address changes made in U.S. GAAP following the FASB’s issuance of ASU 2106–13, the FDIC is amending its capital rule 44 to give banking organizations the option to phase in the immediate, potentially adverse effects of CECL adoption over a three-year period. The FDIC did not receive any public comments on the supporting information it presented in the Regulatory Flexibility Act section of the Notice of Proposed Rulemaking. The Agencies did receive public comments on the proposed rulemaking. A summary of those comments, and the Agencies’ consideration of them, is presented in Section II.B. The vast majority of public comments on the NPR related to the implementation of CECL rather than the economic impacts of the proposed transition period. Several commenters requested that the FDIC increase the transition period from the proposed three-year transition in the NPR to five years in order to develop and validate the necessary data and models. One commenter opposed expansion of the transition period, claiming that the three-year phase in is already generous given the advance notice banks have had of the new accounting standards, and that the new capital requirements reflect the socially optimal level of capital. Upon consideration of the comments, the FDIC has chosen to maintain the proposed three-year transition period. The FDIC believes that the three-year CECL transition provision will adequately address banking organizations’ challenges in capital planning for CECL implementation, while reducing the likelihood of a coincidence of rising capital requirements during a future downturn in the business cycle which could reduce the benefits of the rule and have deleterious effects on lending activity . Description of the Final Rule Economic Impacts on Small Entities A description of the rule is presented Section III: Final Rule. Please refer to it for further information. The final rule applies to all FDICsupervised small entities. The FDIC supervises 3,575 depository institutions, of which 2,763 are defined as small banking entities by the terms of the RFA.45 However, the number of small entities that will elect to utilize the three-year transition schedule is difficult to estimate with available information. Utilization will likely depend on an institution’s business model, the preferences of senior management or ownership, the assets held by the institution, and reasonable expectations of future macroeconomic conditions, among other things. As described in the overview section, the adoption of CECL will result in earlier recognition of credit losses when compared to the current incurred loss methodology. Therefore, the rule is Other Federal Rules The FDIC has not identified any likely duplication, overlap, and/or potential conflicts between the final rule and any other federal rule. 2014). ‘‘SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates.’’ See 13 CFR 121.103. Following these regulations, the FDIC uses a covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to determine whether the covered entity is ‘‘small’’ for the purposes of RFA. 43 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12 CFR 324.20 (FDIC). 44 Under section 37 of the Federal Deposit Insurance Act, the accounting principles applicable to reports or statements required to be filed with the agencies by all insured depository institutions must be uniform and consistent with U.S. GAAP. See 12 U.S.C. 1831n(a)(2)(A). VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 45 Call PO 00000 Report data, June 30 2018. Frm 00015 Fmt 4701 Sfmt 4700 4235 intended to provide relief to covered institutions for certain adverse effects associated with the timing difference in provisioning for such losses, should they elect to utilize the option that this rule provides. The final rule will benefit small, FDIC-supervised institutions that adopt the three year transition schedule by allowing them to phase-in any needed increases in capital associated with the implementation of CECL over that time, thereby reducing costs by the time value of money. It is difficult to accurately estimate the potential benefit for small institutions with available data because it depends on the assets held by small institutions, their provision activity, future economic conditions, and the decisions of senior management. However, institutions will ultimately need to raise the same amount of capital whether they use the phase-in option or not. The rule allows banks to spread the cost of raising additional capital over three years rather than incurring that cost right away, should they choose to do so. The value of that option depends on the discount rate, which is generally assumed to be near the risk-free interest rate, so the benefits of the rule are unlikely to constitute a significant economic impact. The final rule would pose some small regulatory costs for small, FDICsupervised institutions that opt to utilize the three-year transition schedule. However, the small regulatory costs associated with implementing the three-year transition schedule will be less than the benefits posed by utilizing the schedule for those institutions that opt to utilize it. Alternatives Considered As an alternative to the final rule, the FDIC considered allowing CECL to go into effect with no accompanying action by the financial regulators. However, this alternative would likely result in higher costs for small entities. The FDIC considered a longer transition period of up to five years, as some commenters requested. While this alternative might reduce the costs of adopting CECL more than the proposed alternative, it also heightens the risk of capital increases coinciding with a potential future downturn in the business cycle. The coincidence of rising capital requirements during a future downturn in the business cycle could reduce the benefits of the proposed rule and have deleterious effects on lending activity. A few commenters suggested allowing dynamic amortization whereby differences in allowances from an incurred loss estimate after the effective date could be amortized over the E:\FR\FM\14FER2.SGM 14FER2 4236 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations remaining transition period in order to address the volatility in the CECL allowance from a downturn in economic forecasts. The FDIC responded that, while there may be difficulties for capital planning due to the uncertainty of the economic environment at the time of CECL adoption, the extended transition period will mitigate any dayone adverse effects. The straight-line approach adopted by the FDIC avoids unnecessary complexity and operational burdens. Certification Based on the information presented above, the FDIC certifies that this rule will not have a significant economic impact on a substantial number of small entities. C. Plain Language Section 722 of the Gramm-LeachBliley Act 46 requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies have sought to present the final rule in a simple and straightforward manner and did not receive any comments on the use of plain language. D. OCC Unfunded Mandates Reform Act of 1995 The OCC analyzed the final rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the final rule includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted for inflation). The OCC has determined that this final rule would not result in expenditures by State, local, and Tribal governments, or the private sector, of $100 million or more in any one year. Accordingly, the OCC has not prepared a written statement to accompany this proposal. E. Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) For purposes of SBREFA, the OMB makes a determination as to whether a final rule constitutes a ‘‘major’’ rule. If a rule is deemed a ‘‘major rule’’ by the OMB, SBREFA generally provides that the rule may not take effect until at least 60 days following its publication.47 Notwithstanding any potential delay related to the OMB’s pending determination, banking organizations subject to this final rule will be permitted to elect to comply with it as of January 1, 2019. SBREFA defines a ‘‘major rule’’ as any rule that the Administrator of the Office of Information and Regulatory Affairs of the OMB finds has resulted in or is likely to result in—(A) an annual effect on the economy of $100,000,000 or more; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies or geographic regions, or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreignbased enterprises in domestic and export markets.48 As required by SBREFA, the agencies will submit the final rule and other appropriate reports to Congress and the Government Accountability Office for review. F. Administrative Procedure Act and Riegle Community Development and Regulatory Improvement Act of 1994 The Administrative Procedure Act (APA) requires that a final rule be published in the Federal Register no less than 30 days before its effective date unless, among other exceptions, the final rule relieves a restriction.49 Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (‘‘RCDRIA’’),50 in determining the effective date and administrative compliance requirements for a new regulation that imposes additional reporting, disclosure, or other requirements on insured depository institutions, each Federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations that impose additional reporting, disclosure, or other new requirements on insured depository institutions generally to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.51 48 5 46 Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). 47 5 U.S.C. 801(a)(3). VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 U.S.C. 804(2). U.S.C. 553(d)(1). 50 12 U.S.C. 4802(a). 51 12 U.S.C. 4802. Frm 00016 Fmt 4701 List of Subjects 12 CFR Part 1 Banks, Banking, National banks, Reporting and recordkeeping requirements, Securities. 12 CFR Part 3 Administrative practice and procedure, Capital, National banks, Risk. 12 CFR Part 5 Administrative practice and procedure, Federal savings associations, National banks, Reporting and recordkeeping requirements, Securities. 12 CFR Part 23 Banks, Banking, National banks, Lease financing transactions, Leasing, Reporting and recordkeeping requirements. 12 CFR Part 24 Affordable housing, Community development, Credit, Investments, Economic development and job creation, Low- and moderate-income areas, Low and moderate income housing, National banks, Public welfare investments, Reporting and recordkeeping requirements, Rural areas, Small businesses, Tax credit investments. 12 CFR Part 32 National banks, Reporting and recordkeeping requirements. 49 5 PO 00000 In accordance with these provisions, the agencies considered any administrative burdens, as well as benefits, that the final rule would place on depository institutions and their customers in determining the effective date and administrative compliance requirements of the final rule. The final rule provides regulatory capital transition provisions for banking organizations that early adopt CECL beginning after December 15, 2018, and thus relieves those banking organizations from compliance with certain stricter capital requirements that would otherwise have taken effect on January 1, 2019. However, the final rule also imposes new disclosure requirements for institutions that opt to utilize the three-year transition period. Therefore, in accordance with RCDRIA and the APA, the final rule will be effective no earlier than the first day of the calendar quarter following 30 days from the date on which the final rule is published in the Federal Register. Notwithstanding, banking organizations subject to this final rule will be permitted to elect to comply with it as of January 1, 2019. Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations 12 CFR Part 46 12 CFR Part 390 Banking, Banks, Capital, Disclosures, National banks, Recordkeeping, Risk, Savings associations, Stress test. Administrative practice and procedure, Advertising, Aged, Civil rights, Conflict of interests, Credit, Crime, Equal employment opportunity, Fair housing, Government employees, Individuals with disabilities, Reporting and recordkeeping requirements, Savings associations. 12 CFR Part 208 Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements, Securities. 12 CFR Part 211 Exports, Federal Reserve System, Foreign banking, Holding companies, Investments, Reporting and recordkeeping requirements. Office of the Comptroller of the Currency For the reasons set out in the joint preamble, the OCC proposes to amend 12 CFR chapter I as follows. PART 1—INVESTMENT SECURITIES 12 CFR Part 215 Credit, Penalties, Reporting and recordkeeping requirements. 12 CFR Part 217 Administrative practice and procedure, Banks, Banking, Capital, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Risk, Securities. 12 CFR Part 223 Banks, Banking, Federal Reserve System. 12 CFR Part 225 Administrative practice and procedure, Banks, Banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 252 Administrative practice and procedure, Banks, Banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 324 Administrative practice and procedure, Banks, Banking, Reporting and recordkeeping requirements, Savings associations. 12 CFR Part 325 Banks, Banking, Reporting and recordkeeping requirements. 12 CFR Part 327 Bank deposit insurance, Banks, Banking, Savings associations. 12 CFR Part 347 Authority delegation (Government agencies), Bank deposit insurance, Banks, Banking, Credit, Foreign banking, Investments, Reporting and recordkeeping requirements, U.S. Investments abroad. VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 1. The authority citation for part 1 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 24 (Seventh), and 12 U.S.C. 93a. 2. Section 1.2 is amended by revising paragraph (a)(2) to read as follows: ■ § 1.2 Definitions. (a) * * * (2) The balance of a bank’s allowance for loan and lease losses or adjusted allowances for credit losses, as applicable, not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (a)(1) of this section, as reported in the bank’s Call Report. * * * * * PART 3—CAPITAL ADEQUACY STANDARDS 3. The authority citation for part 3 continues to read as follows: ■ Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B). 4. Section 3.2 is amended by: a. Adding in alphabetical order a definition for ‘‘adjusted allowances for credit losses (AACL)’’; ■ b. Revising the definitions of ‘‘carrying value’’; ■ c. Adding in alphabetical order a definition for ‘‘current expected credit losses (CECL)’’; and ■ d. Revising the definition for ‘‘eligible credit reserves’’ and paragraph (2) of the definition of ‘‘standardized total riskweighted assets’’. The additions and revisions read as follows: ■ ■ § 3.2 Definitions. * * * * * Adjusted allowances for credit losses (AACL) means, with respect to a national bank or Federal savings PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 4237 association that has adopted CECL, valuation allowances that have been established through a charge against earnings or retained earnings for expected credit losses on financial assets measured at amortized cost and a lessor’s net investment in leases that have been established to reduce the amortized cost basis of the assets to amounts expected to be collected as determined in accordance with GAAP. For purposes of this part, adjusted allowances for credit losses include allowances for expected credit losses on off-balance sheet credit exposures not accounted for as insurance as determined in accordance with GAAP. Adjusted allowances for credit losses exclude ‘‘allocated transfer risk reserves’’ and allowances created that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities. * * * * * Carrying value means, with respect to an asset, the value of the asset on the balance sheet of the national bank or Federal savings association as determined in accordance with GAAP. For all assets other than available-forsale debt securities or purchased credit deteriorated assets, the carrying value is not reduced by any associated credit loss allowance that is determined in accordance with GAAP. * * * * * Current Expected Credit Losses (CECL) means the current expected credit losses methodology under GAAP. * * * * * Eligible credit reserves means: (1) For a national bank or Federal savings association that has not adopted CECL, all general allowances that have been established through a charge against earnings to cover estimated credit losses associated with on- or offbalance sheet wholesale and retail exposures, including the ALLL associated with such exposures, but excluding allocated transfer risk reserves established pursuant to 12 U.S.C. 3904 and other specific reserves created against recognized losses; and (2) For a national bank or Federal savings association that has adopted CECL, all general allowances that have been established through a charge against earnings or retained earnings to cover expected credit losses associated with on- or off-balance sheet wholesale and retail exposures, including AACL associated with such exposures. Eligible credit reserves exclude allocated transfer risk reserves established pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on purchased credit deteriorated assets and available- E:\FR\FM\14FER2.SGM 14FER2 4238 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations for-sale debt securities, and other specific reserves created against recognized losses. * * * * * Standardized total risk-weighted assets means: * * * * * (2) Any amount of a national bank’s or Federal savings association’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, that is not included in tier 2 capital and any amount of ‘‘allocated transfer risk reserves.’’ * * * * * ‘‘ALLL’’ and adding in its place the words ‘‘ALLL or AACL, as applicable,’’ and in the second occurrence ‘‘ALLL or AACL, as applicable’’ is added in its place. § 3.22 [Amended] [Amended] 5. Section 3.10 is amended in paragraph (c)(3)(ii)(A) by removing the words ‘‘allowance for loan and lease losses’’ and adding in their place the words ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’. § 3.20 § 3.124 [Amended] ■ [Amended] 6a. In § 3.20, in paragraph (d)(3), remove first occurrence of the word ■ [Amended] 8. Section 3.173 is amended: a. In Table 2 by adding a paragraph (e); ■ b. In Table 3, by revising its paragraph (e), redesignating paragraph (f) as paragraph (g), and adding a new paragraph (f); and ■ c. In Table 5 by: ■ i. Removing the phrase ‘‘allowance for loan and lease losses,’’ and adding in its place the phrase ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’ in its paragraph (a)(5); and ■ ii. Revising its paragraph (g). The additions and revisions read as follows: ■ 7a. In § 3.63, Table 5 is amended in its paragraphs (a)(5) and (e)(5) by removing the phrase ‘‘allowance for loan and lease losses,’’ and adding in its place wherever it appears the phrase ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’ and in its paragraph (g) by removing the word ‘‘ALLL’’ and adding in its place the words ‘‘ALLL or AACL, as applicable’’. § 3.10 § 3.173 ■ 6b. In § 3.22, in footnote 23 at the paragraph (c) subject heading, remove the word ‘‘ALLL’’ and add in its place the words ‘‘ALLL or AACL, as applicable,’’. ■ § 3.63 the words ‘‘ALLL or AACL, as applicable,’’ and in paragraph (b)(2) remove the word ‘‘ALLL’’ and add in its place ‘‘ALLL or AACL, as applicable’’. ■ [Amended] 7b. In § 3.124, in paragraph (a) remove the word ‘‘ALLL’’ and add in its place ■ § 3.173 Disclosures by certain advanced approaches national banks or Federal savings associations. * * * * * TABLE 2 TO § 3.173—CAPITAL STRUCTURE * * (e) * * * * * (1) Whether the national bank or Federal savings association has elected to phase in recognition of the transitional amounts as defined in § 3.301. (2) The national bank’s or Federal savings association’s common equity tier 1 capital, tier 1 capital, and total capital without including the transitional amounts. TABLE 3 TO § 3.173—CAPITAL ADEQUACY * * (e) (f) * * * * * * * * (1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 3.301: (A) For the top consolidated group; and (2) For each depository institution subsidiary. Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL: (1) For the top consolidated group; and (2) For each depository institution subsidiary. * * * * * * * * * * * TABLE 5 TO § 3.173—CREDIT RISK: GENERAL DISCLOSURES * * (g) * * * Reconciliation of changes in ALLL or AACL, as applicable.6 * * * * * * * * * * * * * * 6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately. VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations * * * * * Subpart G—Transition Provisions 9. Section 3.301 is added to subpart G to read as follows: ■ § 3.301 Current Expected Credit Losses (CECL) Transition. (a) CECL transition provision criteria. A national bank or Federal savings association may elect to use a CECL transition provision pursuant to this section only if the national bank or Federal savings association records a reduction in retained earnings due to the adoption of CECL as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL. (2) A national bank or Federal savings association that elects to use the CECL transition provision must use the CECL transition provision in the first Call Report filed by the national bank or Federal savings association after it adopts CECL. (3) A national bank or Federal savings association that does not elect to use the CECL transition provision as of the first Call Report filed as described in paragraph (a)(2) of this section may not elect to use the CECL transition provision in subsequent reporting periods. (b) Definitions. For purposes of this section, the following definitions apply: (1) Transition period means the threeyear period beginning the first day of the fiscal year in which a national bank or Federal savings association adopts CECL. (2) CECL transitional amount means the decrease net of any DTAs, in the amount of a national bank’s or Federal savings association’s retained earnings as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL from the amount of the national bank’s or Federal savings association’s retained earnings as of the closing of the fiscal year-end immediately prior to the national bank’s or Federal savings association’s adoption of CECL. (3) DTA transitional amount means the increase in the amount of a national bank’s or Federal savings association’s DTAs arising from temporary differences as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL from the amount of the national bank’s or Federal savings association’s DTAs arising from temporary differences as of the closing of the fiscal year-end immediately prior to the national bank’s or Federal savings association’s adoption of CECL. VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 (4) AACL transitional amount means the difference in the amount of a national bank’s or Federal savings association’s AACL as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL and the amount of the national bank’s or Federal savings association’s ALLL as of the closing of the fiscal year-end immediately prior to the national bank’s or Federal savings association’s adoption of CECL. (5) Eligible credit reserves transitional amount means the increase in the amount of a national bank’s or Federal savings association’s eligible credit reserves as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL from the amount of the national bank’s or Federal savings association’s eligible credit reserves as of the closing of the fiscal year-end immediately prior to the national bank’s or Federal savings association’s adoption of CECL. (c) Calculation of CECL transition provision. (1) For purposes of the election described in paragraph (a)(1) of this section, a national bank or Federal savings association must make the following adjustments in its calculation of regulatory capital ratios: (i) Increase retained earnings by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase retained earnings by fifty percent of its CECL transitional amount during the second year of the transition period, and increase retained earnings by twentyfive percent of its CECL transitional amount during the third year of the transition period; (ii) Decrease amounts of DTAs arising from temporary differences by seventyfive percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the second year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the third year of the transition period; (iii) Decrease amounts of AACL by seventy-five percent of its AACL transitional amount during the first year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the second year of the transition period, and decrease amounts of AACL by twentyfive percent of its AACL transitional amount during the third year of the transition period; PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 4239 (iv) Increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by twentyfive percent of its CECL transitional amount during the third year of the transition period; (2) For purposes of the election described in paragraph (a)(1) of this section, an advanced approaches national bank or Federal savings association must make the following additional adjustments to its calculation of regulatory capital ratios: (i) Increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twentyfive percent of its CECL transitional amount during the third year of the transition period; and (ii) An advanced approaches national bank or Federal savings association that has completed the parallel run process and that has received notification from the OCC pursuant to § 3.121(d) must decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the second year of the transition provision, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the third year of the transition provision. (3) An advanced approaches national bank or Federal savings association that has completed the parallel run process and that has received notification from the OCC pursuant to § 3.121(d), and whose amount of expected credit loss exceeded its eligible credit reserves immediately prior to the adoption of CECL, and that this has an increase in common equity tier 1 capital as of the beginning of the fiscal year in which it adopts CECL after including the first E:\FR\FM\14FER2.SGM 14FER2 4240 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations year portion of the CECL transitional amount must decrease its CECL transitional amount used in paragraph (c) of this section by the full amount of its DTA transitional amount. (4) Notwithstanding any other requirement in this section, for purposes of this paragraph, in the event of a business combination involving a national bank or Federal savings association where one or both of the national banks or Federal savings associations have elected the treatment described in this section: (i) If the acquirer national bank or Federal savings association (as determined under GAAP) elected the treatment described in this section, the acquirer national bank or Federal savings association must continue to use the transitional amounts (unaffected by the business combination) that it calculated as of the date that it adopted CECL through the end of its transition period. (ii) If the acquired insured depository institution (as determined under GAAP) elected the treatment described in this section, any transitional amount of the acquired insured depository institution does not transfer to the resulting national bank or Federal savings association. PART 5—RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES 10. The authority citation for part 5 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 24a, 93a, 215a–2, 215a–3, 481, 1462a, 1463, 1464, 2901 et seq., 3907, and 5412(b)(2)(B). 11. Section 5.3 is amended by revising paragraph (e)(2) to read as follows: ■ § 5.3 Definitions. * * * * * (e) * * * (2) The balance of a national bank’s or Federal savings association’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (e)(1) of this section, as reported in the Call Report. * * * * * ■ 12. Section 5.37 is amended by revising paragraph (c)(3)(ii) to read as follows: § 5.37 Investment in national bank or Federal savings association premises. * * * (c) * * * (3) * * * VerDate Sep<11>2014 * * (ii) The balance of a national bank’s or Federal savings association’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (c)(3)(i) of this section, as reported in the Call Report. * * * * * PART 23—LEASING 13. The authority citation for part 23 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 93a. 14. Section 23.2 is amended by revising paragraph (b)(2) to read as follows: ■ § 23.2 * * * * (b) * * * (2) The balance of a bank’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (b)(1) of this section, as reported in the bank’s Call Report. * * * * * PART 24—COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS 15. The authority citation for part 24 continues to read as follows: ■ Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818. 16. Section 24.2 is amended by revising paragraph (b)(2) to read as follows: ■ Definitions. * Definitions * * * * * (c) * * * (2) The balance of a national bank’s or savings association’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (c)(1) of this section, as reported in the bank’s Call Report. * * * * * PART 46—ANNUAL STRESS TEST 21. The authority citation for part 46 continues to read as follows: ■ Authority: 12 U.S.C. 93a; 1463(a)(2); 5365(i)(2); and 5412(b)(2)(B). § 46.8 [Amended] 22. Section 46.8 is amended by removing the phrase ‘‘loan and lease’’ and adding in its place ‘‘credit’’ in paragraphs (c)(3) and (d)(1). * * * * * ■ Board of Governors of the Federal Reserve System 12 CFR Chapter II Authority and Issuance For the reasons set forth in the preamble, chapter II of title 12 of the Code of Federal Regulations is proposed to be amended as follows: PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 23. The authority citation for part 208 continues to read as follows: ■ Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321–338a, 371d, 461, 481–486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1833(j), 1828(o), 1831, 1831o, 1831p–1, 1831r–1, 1831w, 1831x, 1835a, 1882, 2901– 2907, 3105, 3310, 3331–3351, 3905–3909, and 5371; 15 U.S.C. 78b, 78I(b), 78l(i), 780– 4(c)(5), 78q, 78q–1, and 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128. PART 32—LENDING LIMITS * 17. The authority citation for part 32 continues to read as follows: Jkt 247001 § 32.2 * * * * (b) * * * (2) The balance of a bank’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (b)(1) of this section, as reported in the bank’s Call Report. * * * * * ■ 18:23 Feb 13, 2019 18. Section 32.2 is amended by revising paragraph (c)(2) to read as follows: ■ Definitions. * § 24.2 Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463, 1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 24. In § 208.2, paragraph (d) is revised to read as follows: ■ § 208.2 Definitions. * * * * (d) Capital stock and surplus means, unless otherwise provided in this part, or by statute: E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations (1) Tier 1 and tier 2 capital included in a member bank’s risk-based capital (as defined in § 217.2 of Regulation Q); and (2) The balance of a member bank’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in its tier 2 capital for calculation of risk-based capital, based on the bank’s most recent Report of Condition and Income filed under 12 U.S.C. 324. * * * * * PART 211—INTERNATIONAL BANKING OPERATIONS (REGULATION K) 25. The authority citation for part 211 continues to read as follows: ■ Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s, 1681w, 6801 and 6805. Subpart A—International Operations of U.S. Banking Organizations for credit losses, as applicable, to the extent permitted under U.S. generally accepted accounting principles, or a reduction in the principal amount of the asset by application of interest payments or other collections on the asset. However, the Allowance for Loan and Lease Losses or allowance for credit losses, as applicable, must be replenished in such amount necessary to restore it to a level which adequately provides for the estimated losses inherent in the banking institution’s loan portfolio. * * * * * PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O) 28. The authority citation for part 215 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468, 1817(k), 5412; and Pub. L. 102–242, 105 Stat. 2236 (1991). 29. In § 215.2, revise paragraph (i) to read as follows: ■ 26. In § 211.2, revise paragraph (c)(1) to read as follows: § 215.2 § 211.2 * ■ Definitions. * * * * * (c) * * (1) For organizations subject to Regulation Q: (i) Tier 1 and tier 2 capital included in an organization’s risk-based capital (under Regulation Q); and (ii) The balance of allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in an organization’s tier 2 capital for calculation of risk-based capital, based on the organization’s most recent consolidated Report of Condition and Income. * * * * * Subpart D—International Lending Supervision 27. In § 211.43, revise paragraph (c)(4) to read as follows: ■ § 211.43 Allocated transfer risk reserve. * * * * * (c) * * * (4) Alternative accounting treatment. A banking institution is not required to establish an ATRR if it writes down in the period in which the ATRR is required, or has written down in prior periods, the value of the specified international assets in the requisite amount for each such asset. For purposes of this paragraph, international assets may be written down by a charge to the Allowance for Loan and Lease Losses or the allowance VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 Definitions. * * * * (i) Lending limit. The lending limit for a member bank is an amount equal to the limit of loans to a single borrower established by section 5200 of the Revised Statutes,52 12 U.S.C. 84. This amount is 15 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are not fully secured, and an additional 10 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the loan. The lending limit also includes any higher amounts that are permitted by section 5200 of the Revised Statutes for the types of obligations listed therein as exceptions to the limit. A member bank’s unimpaired capital and unimpaired surplus equals: (1) The bank’s tier 1 and tier 2 capital included in the bank’s risk-based capital under the capital rule of the appropriate Federal banking agency, based on the bank’s most recent consolidated report of condition filed under 12 U.S.C. 1817(a)(3); and (2) The balance of the bank’s allowance for loan and lease losses or 52 Where State law establishes a lending limit for a State member bank that is lower than the amount permitted in section 5200 of the Revised Statutes, the lending limit established by applicable State laws shall be the lending limit for the State member bank. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 4241 adjusted allowance for credit losses, as applicable, not included in the bank’s tier 2 capital for purposes of the calculation of risk-based capital under the capital rule of the appropriate Federal banking agency, based on the bank’s most recent consolidated reports of condition filed under 12 U.S.C. 1817(a)(3). * * * * * PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q) 30. The authority citation for part 217 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 321–338a, 481–486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, 4808, 5365, 5368, 5371. 31. In § 217.2, a. Add in alphabetical order a definition for ‘‘adjusted allowances for credit losses (AACL)’’; ■ b. Revise the definition of ‘‘carrying value’’; ■ c. Add in alphabetical order a definition for ‘‘current expected credit losses (CECL)’’; and ■ d. Revise the definitions of ‘‘eligible credit reserves’’ and paragraph (2) or the definition of ‘‘standardized total riskweighted assets’’. The additions and revisions read as follows: ■ ■ § 217.2 Definitions. * * * * * Adjusted allowances for credit losses (AACL) means, with respect to a Boardregulated institution that has adopted CECL, valuation allowances that have been established through a charge against earnings or retained earnings for expected credit losses on financial assets measured at amortized cost and a lessor’s net investment in leases that have been established to reduce the amortized cost basis of the assets to amounts expected to be collected as determined in accordance with GAAP. For purposes of this part, adjusted allowances for credit losses include allowances for expected credit losses on off-balance sheet credit exposures not accounted for as insurance as determined in accordance with GAAP. Adjusted allowances for credit losses exclude ‘‘allocated transfer risk reserves’’ and allowances created that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities. * * * * * Carrying value means, with respect to an asset, the value of the asset on the E:\FR\FM\14FER2.SGM 14FER2 4242 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations balance sheet of a Board-regulated institution as determined in accordance with GAAP. For all assets other than available-for-sale debt securities or purchased credit deteriorated assets, the carrying value is not reduced by any associated credit loss allowance that is determined in accordance with GAAP. * * * * * Current Expected Credit Losses (CECL) means the current expected credit losses methodology under GAAP. * * * * * Eligible credit reserves means: (1) For a Board-regulated institution that has not adopted CECL, all general allowances that have been established through a charge against earnings to cover estimated credit losses associated with on- or off-balance sheet wholesale and retail exposures, including the ALLL associated with such exposures, but excluding allocated transfer risk reserves established pursuant to 12 U.S.C. 3904 and other specific reserves created against recognized losses; and (2) For a Board-regulated institution that has adopted CECL, all general allowances that have been established through a charge against earnings or retained earnings to cover expected credit losses associated with on- or offbalance sheet wholesale and retail exposures, including AACL associated with such exposures. Eligible credit reserves exclude allocated transfer risk reserves established pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities, and other specific reserves created against recognized losses. * * * * * Standardized total risk-weighted assets means: * * * * * (2) Any amount of the Boardregulated institution’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, that is not included in tier 2 capital and any amount of ‘‘allocated transfer risk reserves.’’ * * * * * § 217.10 [Amended] 32. In § 217.10, in paragraph (c)(3)(ii)(A), remove the words ‘‘allowance for loan and lease losses’’ and add, in their place, the words ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’. ■ § 217.20 [Amended] 33a. In § 217.20, in paragraph (d)(3), remove the first occurrence of the word ‘‘ALLL’’ and add in its place the words ‘‘ALLL or AACL, as applicable,’’ and in the second occurrence ‘‘ALLL or AACL, as applicable’’ is added in its place. ■ § 217.22 [Amended] 33b. In § 217.22, in footnote 23 at the paragraph (c) subject heading, remove the word ‘‘ALLL’’ and add in its place the words ‘‘ALLL or AACL, as applicable,’’. ■ § 217.63 [Amended] 34a. In Table 5 to § 217.63, remove the words ‘‘allowance for loan and lease losses’’ and add, in their place, the words ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’ and remove the word ‘‘ALLL’’ and add, in its place, the words ‘‘ALLL or AACL, as applicable’’. ■ § 217.124 [Amended] 34b. In § 217.124, in paragraph (a) remove the word ‘‘ALLL’’ and add in its place the words ‘‘ALLL or AACL, as applicable,’’ and in paragraph (b)(2) remove the word ‘‘ALLL’’ and add in its place ‘‘ALLL or AACL, as applicable’’. ■ 35. Amend § 217.173 as follows: ■ a. In Table 2, add paragraph (e); ■ b. In Table 3, revise paragraph (e), redesignate paragraph (f) as paragraph (g), and add a new paragraph (f); and ■ c. In Table 5, revise paragraphs (a), (e), and (g). The additions and revisions read as follows. ■ § 217.173 Disclosures by certain advanced approaches Board-regulated institutions. * * * * * TABLE 2 TO § 217.173—CAPITAL STRUCTURE * * (e) * * * * * (1) Whether the Board-regulated institution has elected to phase in recognition of the transitional amounts as defined in § 217.300(f). (2) The Board-regulated institution’s common equity tier 1 capital, tier 1 capital, and total capital without including the transitional amounts as defined in § 217.300(f). TABLE 3 TO § 217.173—CAPITAL ADEQUACY * * (e) (f) * * * * * * * * (1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 217.300(f): (A) For the top consolidated group; and (2) For each depository institution subsidiary. Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL: (1) For the top consolidated group; and (2) For each depository institution subsidiary. * * * * * * * * * TABLE 51 TO § 217.173—CREDIT RISK: GENERAL DISCLOSURES Qualitative disclosures ... VerDate Sep<11>2014 18:23 Feb 13, 2019 (a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 7 to § 217.173), including: (1) Policy for determining past due or delinquency status; Jkt 247001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\14FER2.SGM 14FER2 4243 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations TABLE 51 TO § 217.173—CREDIT RISK: GENERAL DISCLOSURES—Continued (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes). (5) Description of the methodology that the entity uses to estimate its allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and (7) Discussion of the Board-regulated institution’s credit risk management policy. * * (e) * * (g) * * * * * * By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and on nonaccrual; (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, at the end of each period, disaggregated on the basis of the entity’s impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and (6) Charge-offs during the period. * * * Reconciliation of changes in ALLL or AACL, as applicable.6 * * * * * * * * 1 Table 5 to § 217.173 does not cover equity exposures, which should be reported in Table 9. for example, ASC Topic 815–10 and 210–20, as they may be amended from time to time. 3 Geographical areas may comprise individual countries, groups of countries, or regions within countries. A Board-regulated institution might choose to define the geographical areas based on the way the company’s portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified. 4 A Board-regulated institution is encouraged also to provide an analysis of the aging of past-due loans. 5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately. 6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately. 2 See, * * * * * Subpart G—Transition Provisions 36. Add § 217.301 to subpart G to read as follows: ■ § 217.301 Current expected credit losses (CECL) transition. (a) CECL transition provision. (1) A Board-regulated institution may elect to use a CECL transition provision pursuant to this section only if the Board-regulated institution records a reduction in retained earnings due to the adoption of CECL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL. (2) A Board-regulated institution that elects to use the CECL transition provision must use the CECL transition provision in the first Call Report or FR Y–9C that includes CECL filed by the Board-regulated institution after it adopts CECL. (3) A Board-regulated institution that does not elect to use the CECL transition provision as of the first Call Report or FR Y–9C that includes CECL filed as described in paragraph (a)(2) of this section may not elect to use the CECL VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 transition provision in subsequent reporting periods. (b) Definitions. For purposes of this section, the following definitions apply: (1) Transition period means the threeyear period beginning the first day of the fiscal year in which a Boardregulated institution adopts CECL. (2) CECL transitional amount means the decrease net of any DTAs in the amount of a Board-regulated institution’s retained earnings as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution’s retained earnings as of the closing of the fiscal year-end immediately prior to the Boardregulated institution’s adoption of CECL. (3) DTA transitional amount means the increase in the amount of a Boardregulated institution’s DTAs arising from temporary differences as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution’s DTAs arising from temporary differences as of the closing of the fiscal year-end immediately prior to the Board-regulated institution’s adoption of CECL. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 (4) AACL transitional amount means the difference in the amount of a Boardregulated institution’s AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL and the amount of the Board-regulated institution’s ALLL as of the closing of the fiscal year-end immediately prior to the Board-regulated institution’s adoption of CECL. (5) Eligible credit reserves transitional amount means the increase in the amount of a Board-regulated institution’s eligible credit reserves as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Boardregulated institution’s eligible credit reserves as of the closing of the fiscal year-end immediately prior to the Board-regulated institution’s adoption of CECL. (c) Calculation of CECL transition provision. (1) For purposes of the election described in paragraph (a)(1) of this section, a Board-regulated institution must make the following adjustments in its calculation of regulatory capital ratios: (i) Increase retained earnings by seventy-five percent of its CECL transitional amount during the first year E:\FR\FM\14FER2.SGM 14FER2 4244 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations of the transition period, increase retained earnings by fifty percent of its CECL transitional amount during the second year of the transition period, and increase retained earnings by twentyfive percent of its CECL transitional amount during the third year of the transition period; (ii) Decrease amounts of DTAs arising from temporary differences by seventyfive percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the second year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the third year of the transition period; (iii) Decrease amounts of AACL by seventy-five percent of its AACL transitional amount during the first year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the second year of the transition period, and decrease amounts of AACL by twentyfive percent of its AACL transitional amount during the third year of the transition period; (iv) Increase average total consolidated assets as reported on the Call Report or FR Y–9C for purposes of the leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y–9C for purposes of the leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase average total consolidated assets as reported on the Call Report or FR Y–9C for purposes of the leverage ratio by twenty-five percent of its CECL transitional amount during the third year of the transition period; (2) For purposes of the election described in paragraph (a)(1) of this section, an advanced approaches Boardregulated institution must make the following additional adjustments to its calculation of regulatory capital ratios: (i) Increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twenty- VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 five percent of its CECL transitional amount during the third year of the transition period; and (ii) An advanced approaches Boardregulated institution that has completed the parallel run process and has received notification from the Board pursuant to § 217.121(d) must decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the second year of the transition provision, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the third year of the transition period. (3) An advanced approaches Boardregulated institution that has completed the parallel run process and has received notification from the Board pursuant to § 217.121(d), whose amount of expected credit loss exceeded its eligible credit reserves immediately prior to the adoption of CECL, and that has an increase in common equity tier 1 capital as of the beginning of the fiscal year in which it adopts CECL after including the first year portion of the CECL transitional amount must decrease its CECL transitional amount used in paragraph (c) of this section by the full amount of its DTA transitional amount. (4) Notwithstanding any other requirement in this section, for purposes of this paragraph, in the event of a business combination involving a Board-regulated institution where one or both Board-regulated institutions have elected the treatment described in this section: (i) If the acquirer Board-regulated institution (as determined under GAAP) elected the treatment described in this section, the acquirer Board-regulated institution must continue to use the transitional amounts (unaffected by the business combination) that it calculated as of the date that it adopted CECL through the end of its transition period. (ii) If the acquired company (as determined under GAAP) elected the treatment described in this section, any transitional amount of the acquired company does not transfer to the resulting Board-regulated institution. PART 223—TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W) 37. The authority citation for part 223 continues to read as follows: ■ Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c–1(e), 1828(j), 1468(a), PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 and section 312(b)(2)(A) of the Dodd Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412). Subpart A—Introduction and Definitions 38. In § 223.3, revise paragraph (d) to read as follows: ■ § 223.3 What are the meanings of the other terms used in sections 23A and 23B and this part? * * * * * (d) Capital stock and surplus means the sum of: (1) A member bank’s tier 1 and tier 2 capital under the capital rule of the appropriate Federal banking agency, based on the member bank’s most recent consolidated Report of Condition and Income filed under 12 U.S.C. 1817(a)(3); (2) The balance of a member bank’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in its tier 2 capital under the capital rule of the appropriate Federal banking agency, based on the member bank’s most recent consolidated Report of Condition and Income filed under 12 U.S.C. 1817(a)(3); and (3) The amount of any investment by a member bank in a financial subsidiary that counts as a covered transaction and is required to be deducted from the member bank’s capital for regulatory capital purposes. * * * * * PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 39. The authority citation for part 225 continues to read as follows: ■ Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p–1831i, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331– 3351, 3906, 3907 and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805. 40. In § 225.127, a. Remove ‘‘§ 225.25(b)(6)’’ wherever it appears and add in its place ‘‘§ 225.28(b)(12)’’ and remove ‘‘§ 225.23’’ in paragraphs (a) and (d) and add in its place ‘‘§ 225.23 or § 225.24’’; and ■ b. Revise paragraph (h). The revision reads as follows: ■ ■ § 225.127 Investments in corporations or projects designed primarily to promote community welfare. * * * * * (h) For purposes of paragraph (f) of this section, five percent of the total consolidated capital stock and surplus of a bank holding company includes its total investment in projects described in E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations paragraph (f) of this section, when aggregated with similar types of investments made by depository institutions controlled by the bank holding company. The term total consolidated capital stock and surplus of the bank holding company means total equity capital and the allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, based on the bank holding company’s most recent FR Y–9C (Consolidated Financial Statements for Holding Companies) or FR Y–9SP (Parent Company Only Financial Statements for Small Holding Companies). PART 252—ENHANCED PRUDENTIAL STANDARDS (REGULATION YY) 41. The authority citation for part 252 continues to read as follows: ■ Authority: 12 U.S.C. 321–338a, 481–486, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 3101 note, 3904, 3906–3909, 4808, 5361, 5362, 5365, 5366, 5367, 5368, 5371. Subpart B—Company-Run Stress Test Requirements for Certain U.S. Banking Organizations With Total Consolidated Assets Over $10 Billion and Less Than $50 Billion 42. In § 252.12, revise paragraph (m) to read as follows: ■ § 252.12 Definitions. * * * * * (m) Provision for credit losses means: (1) Until December 31, 2019: (i) With respect to a bank holding company, savings and loan holding company, or state member bank that has not adopted the current expected credit losses methodology under U.S. generally accepted accounting principles (GAAP), the provision for loan and lease losses as reported on the FR Y–9C (and as would be reported on the FR Y–9C or Call Report, as appropriate, in the current stress test cycle); and, (ii) With respect to a bank holding company, savings and loan holding company, or state member bank that has adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses, as would be calculated and reported on the FR Y–9C or Call Report, as appropriate, by a bank holding company, savings and loan holding company, or state member bank that has not adopted the current expected credit losses methodology under GAAP; and (2) Beginning January 1, 2020: (i) With respect to a covered company that has adopted the current expected VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 credit losses methodology under GAAP, the provision for credit losses, as would be reported by the bank holding company, savings and loan holding company, or state member bank on the FR Y–9C or Call Report, as appropriate, in the current stress test cycle; and (ii) With respect to a bank holding company, savings and loan holding company, or state member bank that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the bank holding company, savings and loan holding company, or state member bank on the FR Y–9C or Call Report, as appropriate, in the current stress test cycle. * * * * * ■ 43. In § 252.15, revise paragraph (a)(1) and (2) to read as follows: § 252.15 Methodologies and practices. (a) * * * (1) Losses, pre-provision net revenue, provision for credit losses, and net income; and (2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Board, incorporating the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit exposures throughout the planning horizon. * * * * * ■ 44. In § 252.16, revise paragraph (b)(3) to read as follows: § 252.16 Reports of stress test results. * * * * * (b) * * * (3) For each quarter of the planning horizon, estimates of aggregate losses, pre-provision net revenue, provision for credit losses, net income, and regulatory capital ratios; * * * * * ■ 45. In § 252.17, revise paragraphs (b)(1)(iii)(C), (b)(3)(iii)(C), and (c)(1) to read as follows: § 252.17 Disclosure of stress test results. * * * * * (b) * * * (1) * * * (iii) * * * (C) Provision for credit losses; * * * * * (3) * * * (iii) * * * (C) Provision for credit losses; * * * * * (c) * * * (1) The disclosure of aggregate losses, pre-provision net revenue, provision for PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 4245 credit losses, and net income that is required under paragraph (b) of this section must be on a cumulative basis over the planning horizon. * * * * * Subpart E—Supervisory Stress Test Requirements for U.S. Bank Holding Companies with $50 Billion or More in Total Consolidated Assets and Nonbank Financial Companies Supervised by the Board 46. In § 252.42, revise paragraph (l) to read as follows: ■ § 252.42 Definitions. * * * * * (l) Provision for credit losses means: (1) Until December 31, 2019: (i) With respect to a covered company that has not adopted the current expected credit losses methodology under U.S. generally accepted accounting principles (GAAP), the provision for loan and lease losses as reported on the FR Y–9C (and as would be reported on the FR Y–9C in the current stress test cycle); and (ii) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses, as would be calculated and reported on the FR Y–9C by a covered company that has not adopted the current expected credit losses methodology under GAAP; and (2) Beginning January 1, 2020: (i) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y–9C in the current stress test cycle; and, (ii) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y–9C in the current stress test cycle. * * * * * ■ 47. In § 252.45, revise paragraph (b)(2) to read as follows: § 252.45 Data and information required to be submitted in support of the Board’s analyses. * * * * * (b) * * * (2) Project a company’s pre-provision net revenue, losses, provision for credit losses, and net income; and pro forma capital levels, regulatory capital ratios, and any other capital ratio specified by E:\FR\FM\14FER2.SGM 14FER2 4246 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations the Board under the scenarios described in § 252.44(b). * * * * * Subpart F—Company-Run Stress Test Requirements for U.S. Bank Holding Companies with $50 Billion or More in Total Consolidated Assets and Nonbank Financial Companies Supervised by the Board 48. In § 252.52, revise paragraph (m) to read as follows: ■ § 252.52 Definitions. * * * * * (m) Provision for credit losses means: (1) Until December 31, 2019: (i) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as reported on the FR Y–9C (and as would be reported on the FR Y– 9C in the current stress test cycle); and (ii) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses, as would be calculated and reported on the FR Y–9C by a covered company that has not adopted the current expected credit losses methodology under GAAP; and (2) Beginning January 1, 2020: (i) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y–9C in the current stress test cycle; and (ii) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y–9C in the current stress test cycle. * * * * * ■ 49. In § 252.56, revise paragraph (a)(1) and (2) to read as follows: § 252.56 Methodologies and practices. (a) * * * (1) Losses, pre-provision net revenue, provision for credit losses, and net income; and (2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Board, incorporating the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 exposures throughout the planning horizon. * * * * * ■ 50. In § 252.58, revise paragraphs (b)(2), (b)(3)(ii), and (c)(1)(ii) to read as follows: § 252.58 Disclosure of stress test results. * * * * * (b) * * * (2) A general description of the methodologies used in the stress test, including those employed to estimate losses, revenues, provision for credit losses, and changes in capital positions over the planning horizon. (3) * * * (ii) Provision for credit losses, realized losses or gains on available-forsale and held-to-maturity securities, trading and counterparty losses or gains; * * * * * (c) * * * (1) * * * (i) * * * (ii) Provision for credit losses, realized losses/gains on available-forsale and held-to-maturity securities, trading and counterparty losses, and other losses or gain; * * * * * FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Chapter III Authority and Issuance For the reasons stated in the preamble, the Federal Deposit Insurance Corporation proposes to amend chapter III of Title 12, Code of Federal Regulations as follows: PART 324—CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS 51. The authority citation for part 324 continues to read as follows: ■ Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102–242, 105 Stat. 2236, 2355, as amended by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 2236, 2386, as amended by Pub. L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111–203, 124 Stat. 1376, 1887 (15 U.S.C. 78o–7 note). 52. Section 324.2 is amended by: a. Adding in alphabetical order a definition for ‘‘adjusted allowances for credit losses (AACL)’’; ■ b. Revising the definition of ‘‘carrying value’’; ■ c. Adding in alphabetical order a definition for ‘‘Current Expected Credit Losses (CECL)’’; and ■ ■ PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 d. Revising the definitions of ‘‘eligible credit reserves’’ and ‘‘identified losses’’ and paragraph (2) of the definition of ‘‘standardized total risk-weighted assets’’. The additions and revisions read as follows: ■ § 324.2 Definitions. * * * * * Adjusted allowances for credit losses (AACL) means, with respect to an FDICsupervised institution that has adopted CECL, valuation allowances that have been established through a charge against earnings or retained earnings for expected credit losses on financial assets measured at amortized cost and a lessor’s net investment in leases that have been established to reduce the amortized cost basis of the assets to amounts expected to be collected as determined in accordance with GAAP. For purposes of this part, adjusted allowances for credit losses include allowances for expected credit losses on off-balance sheet credit exposures not accounted for as insurance as determined in accordance with GAAP. Adjusted allowances for credit losses exclude ‘‘allocated transfer risk reserves’’ and allowances created that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities. * * * * * Carrying value means, with respect to an asset, the value of the asset on the balance sheet of the FDIC-supervised institution as determined in accordance with GAAP. For all assets other than available-for-sale debt securities or purchased credit deteriorated assets, the carrying value is not reduced by any associated credit loss allowance that is determined in accordance with GAAP. * * * * * Current Expected Credit Losses (CECL) means the current expected credit losses methodology under GAAP. * * * * * Eligible credit reserves means: (1) For an FDIC-supervised institution that has not adopted CECL, all general allowances that have been established through a charge against earnings to cover estimated credit losses associated with on- or off-balance sheet wholesale and retail exposures, including the ALLL associated with such exposures, but excluding allocated transfer risk reserves established pursuant to 12 U.S.C. 3904 and other specific reserves created against recognized losses; and (2) For an FDIC-supervised institution that has adopted CECL, all general allowances that have been established through a charge against earnings or E:\FR\FM\14FER2.SGM 14FER2 4247 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations retained earnings to cover expected credit losses associated with on- or offbalance sheet wholesale and retail exposures, including AACL associated with such exposures. Eligible credit reserves exclude allocated transfer risk reserves established pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities, and other specific reserves created against recognized losses. * * * * * Identified losses means: (1) When measured as of the date of examination of an FDIC-supervised institution, those items that have been determined by an evaluation made by a state or Federal examiner as of that date to be chargeable against income, capital and/or general valuation allowances such as the allowances for loan and lease losses (examples of identified losses would be assets classified loss, off-balance sheet items classified loss, any provision expenses that are necessary for the FDIC-supervised institution to record in order to replenish its general valuation allowances to an adequate level, liabilities not shown on the FDICsupervised institution’s books, estimated losses in contingent liabilities, and differences in accounts which represent shortages) or the adjusted allowances for credit losses; and (2) When measured as of any other date, those items: (i) That have been determined— (A) By an evaluation made by a state or Federal examiner at the most recent examination of an FDIC-supervised institution to be chargeable against income, capital and/or general valuation allowances; or (B) By evaluations made by the FDICsupervised institution since its most recent examination to be chargeable against income, capital and/or general valuation allowances; and (ii) For which the appropriate accounting entries to recognize the loss have not yet been made on the FDICsupervised institution’s books nor has the item been collected or otherwise settled. * * * * * Standardized total risk-weighted assets * * * (2) Any amount of the FDICsupervised institution’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, that is not included in tier 2 capital and any amount of ‘‘allocated transfer risk reserves.’’ * * * * * § 324.10 [Amended] 53. Section 324.10(c)(3)(ii)(A) is amended by removing the words ‘‘allowance for loan and lease losses’’ and adding in their place the words ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’. ■ § 324.20 [Amended] 54a. In § 324.20, in paragraph (d)(3), remove the first occurrence of the word ‘‘ALLL’’ and add in its place the words ‘‘ALLL or AACL, as applicable,’’ and in the second occurrence ‘‘ALLL or AACL, as applicable’’ is added in its place. ■ § 324.22 [Amended] the words ‘‘ALLL or AACL, as applicable,’’. § 324.63 [Amended] 55a. In Table 5 to § 324.63, in paragraph (a)(5), remove the phrase ‘‘allowance for loan and lease losses,’’ and in paragraph (e)(5) remove the phrase ‘‘allowance for loan and lease losses’’ and add in their place ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’ and in paragraph (g) by removing ‘‘ALLL’’ and adding in its place ‘‘ALLL or AACL, as applicable’’. ■ § 324.124 [Amended] 55b. In § 324.124, in paragraph (a), remove the word ‘‘ALLL’’ and add in its place the words ‘‘ALLL or AACL, as applicable,’’ and in paragraph (b) remove the word ‘‘ALLL’’ and add in its place ‘‘ALLL or AACL, as applicable’’. ■ 56. Section 324.173 is amended: ■ a. In Table 2, by adding paragraph (e); ■ b. In Table 3, by revising paragraph (e), redesignating paragraph (f) as paragraph (g), and adding a new paragraph (f); and ■ c. In Table 5 to § 324.173, in paragraph (a)(5), remove the phrase ‘‘allowance for loan and lease losses,’’ and in paragraph (e)(5) remove the phrase ‘‘allowance for loan and lease losses’’ and add in their place ‘‘allowance for loan and lease losses or adjusted allowance for credit losses, as applicable,’’ and in paragraph (g) by removing ‘‘ALLL’’ and adding in its place ‘‘ALLL or AACL, as applicable’’. The additions and revisions read as set forth below. ■ § 324.173 Disclosures by certain advanced approaches FDIC-supervised institutions. 54b. In § 324.22, in footnote 23 at the paragraph (c) subject heading, remove the word ‘‘ALLL’’ and add in its place ■ * * * * * TABLE 2 TO § 324.173—CAPITAL STRUCTURE * * (e) * * * * * (1) Whether the FDIC-supervised institution has elected to phase in recognition of the transitional amounts as defined in § 324.300(f). (2) The FDIC-supervised institution’s common equity tier 1 capital, tier 1 capital, and total capital without including the transitional amounts as defined in § 324.300(f). TABLE 3 TO § 324.173—CAPITAL ADEQUACY * * (e) (f) * VerDate Sep<11>2014 * * * * * (1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 324.300(f): (A) For the top consolidated group; and (2) For each depository institution subsidiary. Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL: (1) For the top consolidated group; and (2) For each depository institution subsidiary. * 18:23 Feb 13, 2019 * Jkt 247001 PO 00000 * Frm 00027 Fmt 4701 * Sfmt 4700 E:\FR\FM\14FER2.SGM * 14FER2 * 4248 * * Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations * * * Subpart G—Transition Provisions 58. Add § 324.301 to subpart G to read as follows: ■ § 324.301 Current expected credit losses (CECL) transition. (a) CECL transition provision criteria. (1) An FDIC-supervised institution may elect to use a CECL transition provision pursuant to this section only if the FDIC-supervised institution records a reduction in retained earnings due to the adoption of CECL as of the beginning of the fiscal year in which the FDIC-supervised institution adopts CECL. (2) An FDIC-supervised institution that elects to use the CECL transition provision must use the CECL transition provision in the first Call Report filed by the FDIC-supervised institution after it adopts CECL. (3) An FDIC-supervised institution that does not elect to use the CECL transition provision as of the first Call Report filed as described in paragraph (a)(2) of this section may not elect to use the CECL transition provision in subsequent reporting periods. (b) Definitions. For purposes of this section, the following definitions apply: (1) Transition period means the threeyear period beginning the first day of the fiscal year in which an FDICsupervised institution adopts CECL. (2) CECL transitional amount means the decrease net of any DTAs in the amount of an FDIC-supervised institution’s retained earnings as of the beginning of the fiscal year in which the FDIC-supervised institution adopts CECL from the amount of the FDICsupervised institution’s retained earnings as of the closing of the fiscal year-end immediately prior to the FDICsupervised institution’s adoption of CECL. (3) DTA transitional amount means the increase in the amount of an FDICsupervised institution’s DTAs arising from temporary differences as of the beginning of the fiscal year in which the FDIC-supervised institution adopts CECL from the amount of the FDICsupervised institution’s DTAs arising from temporary differences as of the closing of the fiscal year-end immediately prior to the FDICsupervised institution’s adoption of CECL. (4) AACL transitional amount means the difference in the amount of an FDICsupervised institution’s AACL as of the beginning of the fiscal year in which the FDIC-supervised institution adopts CECL and the amount of the FDIC- VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 supervised institution’s ALLL as of the closing of the fiscal year-end immediately prior to the FDICsupervised institution’s adoption of CECL. (5) Eligible credit reserves transitional amount means the increase in the amount of a FDIC-supervised institution’s eligible credit reserves as of the beginning of the fiscal year in which the FDIC-supervised institution adopts CECL from the amount of the FDICsupervised institution’s eligible credit reserves as of the closing of the fiscal year-end immediately prior to the FDICsupervised institution’s adoption of CECL. (c) Calculation of CECL transition provision. (1) For purposes of the election described in paragraph (a)(1) of this section, an FDIC-supervised institution must make the following adjustments in its calculation of regulatory capital ratios: (i) Increase retained earnings by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase retained earnings by fifty percent of its CECL transitional amount during the second year of the transition period, and increase retained earnings by twentyfive percent of its CECL transitional amount during the third year of the transition period; (ii) Decrease amounts of DTAs arising from temporary differences by seventyfive percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the second year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the third year of the transition period; (iii) Decrease amounts of AACL by seventy-five percent of its AACL transitional amount during the first year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the second year of the transition period, and decrease amounts of AACL by twentyfive percent of its AACL transitional amount during the third year of the transition period; (iv) Increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by fifty percent of its PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 CECL transitional amount during the second year of the transition period, and increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by twentyfive percent of its CECL transitional amount during the third year of the transition period; (2) For purposes of the election described in paragraph (a)(1) of this section, an advanced approaches FDICsupervised institution must make the following additional adjustments to its calculation of regulatory capital ratios: (i) Increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twentyfive percent of its CECL transitional amount during the third year of the transition period; and (ii) An advanced approaches FDICsupervised institution that has completed the parallel run process and has received notification from the FDIC pursuant to § 324.121(d) must decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the second year of the transition provision, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the third year of the transition period. (3) An advanced approaches FDICsupervised institution that has completed the parallel run process and has received notification from the FDIC pursuant to § 324.121(d), whose amount of expected credit loss exceeded its eligible credit reserves immediately prior to the adoption of CECL, and that has an increase in common equity tier 1 capital as of the beginning of the fiscal year in which it adopts CECL after including the first year portion of the CECL transitional amount must decrease its CECL transitional amount used in paragraph (c) of this section by the full amount of its DTA transitional amount. (4) Notwithstanding any other requirement in this section, for purposes of this paragraph, in the event of a business combination involving an FDIC-supervised institution where one or both FDIC-supervised institutions E:\FR\FM\14FER2.SGM 14FER2 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations have elected the treatment described in this section: (i) If the acquirer FDIC-supervised institution (as determined under GAAP) elected the treatment described in this section, the acquirer FDIC-supervised institution must continue to use the transitional amounts (unaffected by the business combination) that it calculated as of the date that it adopted CECL through the end of its transition period. (ii) If the acquired insured depository institution (as determined under GAAP) elected the treatment described in this section, any transitional amount of the acquired insured depository institution does not transfer to the resulting FDICsupervised institution. PART 325—CAPITAL MAINTENANCE 59. The authority citation for part 325 continues to read as follows: ■ Authority: 12 U.S.C. 5365(i)(2); 12 U.S.C. 5412(b)(2)(C); 12 U.S.C. 1818, 12 U.S.C. 1819(a)(Tenth), 12 U.S.C. 1831o, and 12 U.S.C. 1831p–1. Subpart C—Annual Stress Test 60. In § 325.2, paragraph (g) is revised to read as follows: ■ § 325.2 Definitions. * * * * * (g) Provision for credit losses means: (1) Until December 31, 2019: (i) With respect to a state nonmember bank or state savings association that has not adopted the current expected credit losses methodology under U.S. generally accepted accounting principles (GAAP), the provision for loan and lease losses as reported on the Call Report in the current stress test cycle; and, (ii) With respect to a state nonmember bank or state savings association that has adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses, as would be calculated and reported on the Call Report by a state nonmember bank or state savings association that has not adopted the current expected credit losses methodology under GAAP; and (2) Beginning January 1, 2020: (i) With respect to a state nonmember bank or state savings association that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as reported in the Call Report in the current stress test cycle; and (ii) With respect to a state nonmember bank or state savings association that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 as would be reported in the Call Report in the current stress test cycle. * * * * * ■ 61. In § 325.5, paragraph (a)(1) and (2) are revised to read as follows: § 325.5 § 325.6 Required reports of stress test results to the FDIC and the Board of Governors of the Federal Reserve System. * * * * * (b) * * * (1) The reports required under paragraph (a) of this section must include under the baseline scenario, adverse scenario, severely adverse scenario and any other scenario required by the FDIC under this subpart, a description of the types of risks being included in the stress test, a summary description of the methodologies used in the stress test, and, for each quarter of the planning horizon, estimates of aggregate losses, pre-provision net revenue, provision for credit losses, net income, and pro forma capital ratios (including regulatory and any other capital ratios specified by the FDIC). In addition, the report must include an explanation of the most significant causes for the changes in regulatory capital ratios and any other information required by the FDIC. * * * * * ■ 63. In § 325.7, revise paragraphs (c)(3) and (d)(1) to read as follows: Publication of stress test results. * * * * * (c) * * * (3) Estimates of aggregate losses, preprovision net revenue, provision for credit losses, net income, and pro forma capital ratios (including regulatory and any other capital ratios specified by the FDIC); and * * * * * (d) * * * (1) The disclosure of aggregate losses, pre-provision net revenue, provisions PO 00000 for credit losses, and net income under this section must be on a cumulative basis over the planning horizon. * * * * * PART 327—ASSESSMENTS Methodologies and practices. (a) * * * (1) Pre-provision net revenues, losses, provision for credit losses, and net income; and (2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Corporation, incorporating the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit exposures throughout the planning horizon. * * * * * ■ 62. In § 325.6, paragraph (b)(1) is revised to read as follows: § 325.7 4249 Frm 00029 Fmt 4701 Sfmt 4700 64. The authority citation for part 327 continues to read as follows: ■ Authority: 12 U.S.C. 1441, 1813, 1815, 1817–19, 1821. Subpart A—In General § 327.16 [Amended] 65. Section 327.16 is amended in footnote 2 to the table in paragraph (a)(1)(ii) by removing the words ‘‘allowance for loan and lease financing receivable losses (ALLL)’’ and adding in their place the words ‘‘allowance for loan and lease financing receivable losses (ALLL) or allowance for credit losses, as applicable’’. ■ PART 347—INTERNATIONAL BANKING 66. The authority citation for Part 347 continues to read as follows: ■ Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103, 3104, 3105, 3108, 3109; Pub L. No. 111–203, section 939A, 124 Stat. 1376, 1887 (July 21, 2010) (codified 15 U.S.C. 78o–7 note). Subpart C—International Lending 67. In § 347.303, revise paragraphs (c)(2) and (4) to read as follows: ■ § 347.303 Allocated transfer risk reserve. * * * * * (c) * * * (2) Separate accounting. A banking institution shall account for an ATRR separately from the Allowance for Loan and Lease Losses or allowance for credit losses, as applicable, and shall deduct the ATRR from ‘‘gross loans and leases’’ to arrive at ‘‘net loans and lease.’’ The ATRR must be established for each asset subject to the ATRR in the percentage amount specified. * * * * * (4) Alternative accounting treatment. A banking institution need not establish an ATRR if it writes down in the period in which the ATRR is required, or has written down in prior periods, the value of the specified international assets in the requisite amount for each such asset. For purposes of this paragraph (c)(4), international assets may be written down by a charge to the Allowance for Loan and Lease Losses or allowance for credit losses, as applicable, or a reduction in the principal amount of the asset by application of interest payments or other collections on the E:\FR\FM\14FER2.SGM 14FER2 4250 Federal Register / Vol. 84, No. 31 / Thursday, February 14, 2019 / Rules and Regulations asset; provided, that only those international assets that may be charged to the Allowance for Loan and Lease Losses or allowance for credit losses, as applicable, pursuant to U.S. generally accepted accounting principles may be written down by a charge to the Allowance for Loan and Lease Losses or allowance for credit losses, as applicable. However, the Allowance for Loan and Lease Losses or allowance for credit losses, as applicable, must be replenished in such amount necessary to restore it to a level which adequately provides for the estimated losses inherent in the banking institution’s loan and lease portfolio. * * * * * PART 390—REGULATIONS TRANSFERRED FROM THE OFFICE OF THRIFT SUPERVISION 68. The authority citation for part 390 continues to read as follows: ■ Authority: 12 U.S.C. 1819. Subpart T—Accounting Requirements 69. In § 390.384, in the appendix in section II, revise paragraph 11, and in paragraph 12, remove the phrase ‘‘provision for loan losses’’ and add in its place ‘‘provision for loan losses or provision for credit losses, as applicable’’. The revision reads as follows: ■ § 390.384 Financial statements for conversions, SEC filings, and offering circulars. * VerDate Sep<11>2014 18:23 Feb 13, 2019 Jkt 247001 PO 00000 * * Frm 00030 * Fmt 4701 * Sfmt 9990 Appendix to § 390.384 * * * II. Income Statement * * * * * 11. Provision for loan losses or provision for credit losses, as applicable. * * * * * Dated: December 18, 2018. William A. Rowe, Chief Risk Officer. By order of the Board of Governors of the Federal Reserve System. Ann E. Misback, Secretary of the Board. Dated at Washington, DC, on December 18, 2018. By order of the Board of Directors. Federal Deposit Insurance Corporation. Valerie J. Best, Assistant Executive Secretary. [FR Doc. 2018–28281 Filed 2–13–19; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P E:\FR\FM\14FER2.SGM 14FER2

Agencies

[Federal Register Volume 84, Number 31 (Thursday, February 14, 2019)]
[Rules and Regulations]
[Pages 4222-4250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28281]



[[Page 4221]]

Vol. 84

Thursday,

No. 31

February 14, 2019

Part III





Department of the Treasury





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Office of the Comptroller of the Currency





Federal Reserve System





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Federal Deposit Insurance Corporation





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12 CFR Parts 1, 3, 5, et al.





Regulatory Capital Rule: Implementation and Transition of the Current 
Expected Credit Losses Methodology for Allowances and Related 
Adjustments to the Regulatory Capital Rule and Conforming Amendments to 
Other Regulations; Final Rule

Federal Register / Vol. 84 , No. 31 / Thursday, February 14, 2019 / 
Rules and Regulations

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 1, 3, 5, 23, 24, 32, and 46

[Docket ID OCC-2018-0009]
RIN 1557-AE32

FEDERAL RESERVE SYSTEM

12 CFR Parts 208, 211, 215, 217, 223, 225, and 252

[Regulation Q; Docket No. R-1605]
RIN 7100-AF04

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 324, 325, 327, 347, and 390

RIN 3064-AE74


Regulatory Capital Rule: Implementation and Transition of the 
Current Expected Credit Losses Methodology for Allowances and Related 
Adjustments to the Regulatory Capital Rule and Conforming Amendments to 
Other Regulations

AGENCY: Office of the Comptroller of the Currency, Treasury; the Board 
of Governors of the Federal Reserve System; and the Federal Deposit 
Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, and the Federal Deposit 
Insurance Corporation (collectively, the agencies) are adopting a final 
rule to address changes to credit loss accounting under U.S. generally 
accepted accounting principles, including banking organizations' 
implementation of the current expected credit losses methodology 
(CECL). The final rule provides banking organizations the option to 
phase in over a three-year period the day-one adverse effects on 
regulatory capital that may result from the adoption of the new 
accounting standard. In addition, the final rule revises the agencies' 
regulatory capital rule, stress testing rules, and regulatory 
disclosure requirements to reflect CECL, and makes conforming 
amendments to other regulations that reference credit loss allowances.

DATES: The final rule is effective on April 1, 2019. Banking 
organizations may early adopt this final rule prior to that date.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Mark Ginsberg, Senior Risk Expert or JungSup Kim, Risk 
Specialist, Capital Policy Division, (202) 649-6983; or Kevin 
Korzeniewski, Counsel, Office of the Chief Counsel, (202) 649-5490; or 
for persons who are hearing impaired, TTY, (202) 649-5597.
    Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan C. Climent, Manager, (202) 872-7526; Andrew Willis, Senior 
Supervisory Financial Analyst, (202) 912-4323; or Noah Cuttler, Senior 
Financial Analyst, (202) 912-4678, Division of Supervision and 
Regulation; or Benjamin W. McDonough, Assistant General Counsel, (202) 
452-2036; David W. Alexander, Counsel, (202) 452-2877; or Asad Kudiya, 
Counsel, (202) 475-6358, Legal Division, Board of Governors of the 
Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. 
For the hearing impaired only, Telecommunication Device for the Deaf 
(TDD), (202) 263-4869.
    FDIC: Benedetto Bosco, Chief, bbosco@fdic.gov; Richard Smith, 
Capital Markets Policy Analyst, rismith@fdic.gov; David Riley, Senior 
Policy Analyst, dariley@fdic.gov; Capital Markets Branch, Division of 
Risk Management Supervision, regulatorycapital@fdic.gov, (202) 898-
6888; or Michael Phillips, Acting Supervisory Counsel, 
mphillips@fdic.gov; Catherine Wood, Counsel, cawood@fdic.gov; Suzanne 
Dawley, Counsel, sudawley@fdic.gov; or Alec Bonander, Attorney, 
abonander@fdic.gov; Supervision Branch, Legal Division, Federal Deposit 
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Overview
    A. Background
    B. Changes to U.S. GAAP
    C. Regulatory Capital
II. Summary of the Proposal
    A. Proposed Revisions to the Capital Rule To Reflect the Change 
in U.S. GAAP
    B. Summary of Comments Received on the Proposal
III. Final Rule
    A. Changes to the Capital Rule To Reflect the Change in U.S. 
GAAP
    1. Introduction of Adjusted Allowances for Credit Losses as a 
New Defined Term
    2. Definition of Carrying Value
    B. CECL Transition Provision
    1. Election of the Optional CECL Transition Provision
    2. Mechanics of the CECL Transition Provision
    3. Business Combinations
    4. Supervisory Oversight
    C. Additional Requirements for Advanced Approaches Banking 
Organizations
    D. Disclosures and Regulatory Reporting
    E. Conforming Changes to Other Agency Regulations
    1. OCC Regulations
    2. Board Regulations
    3. FDIC Regulations
IV. Long Term Considerations With CECL
V. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
    C. Plain Language
    D. OCC Unfunded Mandates Reform Act of 1995
    E. Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA)
    F. Administrative Procedure Act and Riegle Community Development 
and Regulatory Improvement Act of 1994

I. Overview

A. Background

    On May 14, 2018, the Office of the Comptroller of the Currency 
(OCC), the Board of Governors of the Federal Reserve System (Board), 
and the Federal Deposit Insurance Corporation (FDIC) (collectively, the 
agencies) issued a notice of proposed rulemaking (NPR or proposal) that 
would have revised certain of their regulations to account for 
forthcoming changes to credit loss accounting under U.S. generally 
accepted accounting principles (U.S. GAAP).\1\ In particular, the 
proposal would have amended certain of the agencies' rules to address 
the Financial Accounting Standards Board's (FASB) issuance of 
Accounting Standards Update No. 2016-13, Financial Instruments--Credit 
Losses, Topic 326, Measurement of Credit Losses on Financial 
Instruments (ASU 2016-13).\2\ ASU 2016-13 introduces the current 
expected credit losses methodology (CECL), which replaces the incurred 
loss methodology for financial assets measured at amortized cost; 
introduces the term purchased credit deteriorated (PCD) assets, which 
replaces the term purchased credit-impaired (PCI) assets; and modifies 
the treatment of credit losses on available-for-sale (AFS) debt 
securities.
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    \1\ 83 FR 22312 (May 14, 2018).
    \2\ ASU 2016-13 covers measurement of credit losses on financial 
instruments and includes three subtopics within Topic 326: (i) 
Subtopic 326-10 Financial Instruments--Credit Losses--Overall; (ii) 
Subtopic 326-20: Financial Instruments--Credit Losses--Measured at 
Amortized Cost; and (iii) Subtopic 326-30: Financial Instruments--
Credit Losses--Available-for-Sale Debt Securities.
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    The proposal would have applied to banking organizations \3\ that 
are subject

[[Page 4223]]

to the agencies' regulatory capital rule \4\ (capital rule), to banking 
organizations that are subject to stress testing requirements, and to 
banking organizations that file regulatory reports that are uniform and 
consistent with U.S. GAAP.\5\ In particular, the proposal would have 
revised the agencies' capital rule to distinguish which credit loss 
allowances under the new accounting standard would be eligible for 
inclusion in a banking organization's regulatory capital. The proposal 
would also have provided banking organizations that experience a 
reduction in retained earnings as a result of adopting CECL with an 
option to elect a three-year transition period to phase in the effects 
of CECL adoption on regulatory capital. The proposal also would have 
revised regulatory capital disclosure requirements applicable to 
certain banking organizations, amended references to credit loss 
allowances in other regulations, and required the inclusion of CECL 
provisions in a banking organization's company-run stress testing 
projections beginning with the 2020 stress test cycle.
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    \3\ Banking organizations subject to the capital rule include 
national banks, state member banks, state nonmember banks, savings 
associations, and top-tier bank holding companies and savings and 
loan holding companies domiciled in the United States not subject to 
the Board's Small Bank Holding Company Policy Statement (12 CFR part 
225, Appendix C), but exclude certain savings and loan holding 
companies that are substantially engaged in insurance underwriting 
or commercial activities or that are estate trusts, and bank holding 
companies and savings and loan holding companies that are employee 
stock ownership plans.
    \4\ 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part 
324 (FDIC).
    \5\ See 12 U.S.C. 1831n; see also Instructions for Preparation 
of Consolidated Financial Statements for Holding Companies, 
Reporting Form FR Y-9C (Reissued March 2013); Instructions for 
Preparation of Consolidated Reports of Condition and Income, 
Reporting Forms FFIEC 031 and FFIEC 041 (updated September 2017); 
Instructions for Preparation of Consolidated Reports of Condition 
and Income for a Bank with Domestic Offices Only and Total Assets 
Less than $1 Billion, Reporting Form FFIEC 051 (updated September 
2017).
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    The agencies are adopting as final the proposal. The final rule is 
effective as of April 1, 2019, but a banking organization may choose to 
adopt the final rule starting as early as first quarter 2019.

B. Changes to U.S. GAAP

    ASU 2016-13 revises U.S. GAAP and, consequently, affects regulatory 
reports based on U.S. GAAP. CECL differs from the incurred loss 
methodology in several key respects. First, for financial assets 
measured at amortized cost, CECL requires banking organizations to 
recognize lifetime expected credit losses, not just credit losses 
incurred as of the reporting date. CECL requires the incorporation of 
reasonable and supportable forecasts in developing an estimate of 
lifetime expected credit losses, while also maintaining the current 
requirement that banking organizations consider past events and current 
conditions. Furthermore, the probable threshold for recognition of 
allowances in accordance with the incurred loss methodology is removed 
under CECL. Taken together, estimating expected credit losses over the 
life of an asset under CECL, including consideration of reasonable and 
supportable forecasts but without applying the probable threshold that 
exists under the incurred loss methodology, results in earlier 
recognition of credit losses.
    CECL replaces multiple impairment approaches in existing U.S. GAAP. 
CECL allowances will cover a broader range of financial assets than the 
allowance for loan and lease losses (ALLL) under the incurred loss 
methodology. Under the incurred loss methodology, ALLL generally covers 
credit losses on loans held for investment and lease financing 
receivables, with additional allowances for certain other extensions of 
credit and allowances for credit losses on certain off-balance sheet 
credit exposures (with the latter allowances presented as 
liabilities).\6\ These exposures will be within the scope of CECL. In 
addition, CECL applies to credit losses on held-to-maturity (HTM) debt 
securities. As previously mentioned, ASU 2016-13 replaces the term PCI 
assets with the term PCD assets. The PCD asset definition covers a 
broader range of assets than the PCI asset definition. CECL requires 
banking organizations to estimate and record a credit loss allowance 
for a PCD asset at the time of purchase. This credit loss allowance is 
then added to the purchase price to determine the purchase date 
amortized cost basis of the asset for financial reporting purposes. 
Post-acquisition changes in credit loss allowances on PCD assets will 
be established through earnings. This is different from the current 
treatment of PCI assets, for which banking organizations are not 
permitted to estimate and recognize credit loss allowances at the time 
of purchase. Rather, banking organizations generally estimate credit 
loss allowances for PCI assets subsequent to the purchase only if there 
is deterioration in the expected cash flows from such assets.
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    \6\ ``Other extensions of credit'' includes trade and 
reinsurance receivables, and receivables that relate to repurchase 
agreements and securities lending agreements. ``Off-balance sheet 
credit exposures'' includes off-balance sheet credit exposures not 
accounted for as insurance, such as loan commitments, standby 
letters of credit, and financial guarantees. The agencies note that 
credit losses for off-balance sheet credit exposures that are 
unconditionally cancellable by the issuer are not recognized under 
CECL.
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    ASU 2016-13 also introduces new requirements for AFS debt 
securities. The new accounting standard requires that a banking 
organization recognize credit losses on individual AFS debt securities 
through credit loss allowances, rather than through direct write-downs, 
as is currently required under U.S. GAAP. AFS debt securities will 
continue to be measured at fair value, with changes in fair value not 
related to credit losses recognized in other comprehensive income. 
Credit loss allowances on an AFS debt security are limited to the 
amount by which the security's fair value is less than its amortized 
cost.
    Upon adoption of CECL, a banking organization will record a one-
time adjustment to its credit loss allowances as of the beginning of 
its fiscal year of adoption equal to the difference, if any, between 
the amount of credit loss allowances required under the incurred loss 
methodology and the amount of credit loss allowances required under 
CECL. Except for PCD assets, banking organizations will recognize the 
adjustment to the credit loss allowances with offsetting entries to 
deferred tax assets (DTAs), if appropriate, and to the fiscal year's 
beginning retained earnings.
    The effective date of ASU 2016-13 varies for different banking 
organizations. For banking organizations that are U.S. Securities and 
Exchange Commission (SEC) filers,\7\ ASU 2016-13 will become effective 
for the first fiscal year beginning after December 15, 2019, including 
interim periods within that fiscal year. For banking organizations that 
are public business entities (PBE) but not SEC filers (as defined in 
U.S. GAAP),\8\ ASU 2016-13 will become effective for the first fiscal 
year beginning after December 15, 2020, including interim periods 
within that

[[Page 4224]]

fiscal year. For banking organizations that are not PBEs (as defined in 
U.S. GAAP), ASU 2016-13 will become effective for the first fiscal year 
beginning after December 15, 2021, including interim periods within 
those fiscal years.\9\ A banking organization that chooses to adopt ASU 
2016-13 early may do so in a fiscal year beginning after December 15, 
2018, including interim periods within that fiscal year. The following 
table provides a summary of the effective dates.
---------------------------------------------------------------------------

    \7\ For this purpose, an SEC filer is an entity (e.g., a bank 
holding company or savings and loan holding company) that is 
required to file its financial statements with the SEC under the 
federal securities laws or, for an insured depository institution, 
the appropriate federal banking agency under section 12(i) of the 
Securities Exchange Act of 1934. The banking agencies named under 
section 12(i) of the Securities Exchange Act of 1934 are the OCC, 
the Board, and the FDIC.
    \8\ A PBE that is not an SEC filer would include: (1) An entity 
that has issued securities that are traded, listed, or quoted on an 
over-the-counter market, and (2) an entity that has issued one or 
more securities that are not subject to contractual restrictions on 
transfer and is required by law, contract, or regulation to prepare 
U.S. GAAP financial statements (including footnotes) and make them 
publicly available periodically (e.g., pursuant to Section 36 of the 
Federal Deposit Insurance Act and Part 363 of the FDIC's rules). For 
further information on the definition of a PBE, refer to ASU 2013-
12, Definition of a Public Business Entity, issued in December 2013.
    \9\ The FASB amended the effective date to the periods indicated 
for non-PBEs through an ASU issued November 15, 2018, ASU No. 2018-
19, Codification Improvements to Topic 326: Financial Instruments--
Credit Losses. ASU 2016-13 will now take effect for non-PBEs for 
fiscal years beginning after December 15, 2021, including interim 
periods within those fiscal years. Thus, a non-PBE with a calendar 
year fiscal year must adopt ASU 2016-13 as of January 1, 2022, if 
the entity does not elect to early adopt prior to January 1, 2022, 
and would first report in accordance with the credit losses standard 
in its regulatory reports and any financial statements for March 31, 
2022.

                          CECL Effective Dates
------------------------------------------------------------------------
                                                           Regulatory
                                  U.S. GAAP effective   report effective
                                         date                date *
------------------------------------------------------------------------
PBEs that are SEC Filers......  Fiscal years beginning  3/31/2020.
                                 after 12/15/2019,
                                 including interim
                                 periods within those
                                 fiscal years.
Other PBEs (Non-SEC Filers)...  Fiscal years beginning  3/31/2021.
                                 after 12/15/2020,
                                 including interim
                                 periods within those
                                 fiscal years.
Non-PBEs......................  Fiscal years beginning  3/31/2022.
                                 after 12/15/2021,
                                 including interim
                                 periods within those
                                 fiscal years.
Early Adoption................  Early adoption          3/31 of year of
                                 permitted for fiscal    effective date
                                 years beginning after   of early
                                 12/15/2018, including   adoption of ASU
                                 interim periods         2016-13.
                                 within those fiscal
                                 years.
------------------------------------------------------------------------
* For institutions with calendar year-ends.

C. Regulatory Capital

    A banking organization's implementation of CECL will likely affect 
its retained earnings, DTAs, and allowances and, as a result, its 
regulatory capital ratios. Retained earnings are a key component of a 
banking organization's common equity tier 1 (CET1) capital. An increase 
in a banking organization's allowances, including those estimated under 
CECL, generally will reduce the banking organization's earnings or 
retained earnings, and therefore its CET1 capital.\10\ DTAs arising 
from temporary differences (temporary difference DTAs) must be included 
in a banking organization's risk-weighted assets or deducted from CET1 
capital if they exceed certain thresholds. Increases in allowances 
generally give rise to increases in temporary difference DTAs that will 
partially offset the reduction in earnings or retained earnings.\11\ 
Under the capital rule's standardized approach for risk-weighted assets 
(standardized approach), ALLL is included in a banking organization's 
tier 2 capital up to 1.25 percent of its standardized total risk-
weighted assets (excluding standardized market risk-weighted assets, if 
applicable), as those terms are defined in the rule.\12\ An advanced 
approaches banking organization \13\ that has completed the parallel 
run process \14\ includes in its advanced-approaches-adjusted total 
capital any eligible credit reserves that exceed the banking 
organization's total expected credit losses, as defined in the capital 
rule, to the extent that the excess reserve amount does not exceed 0.6 
percent of the banking organization's credit risk-weighted assets.\15\
---------------------------------------------------------------------------

    \10\ However, allowances recognized on PCD assets upon adoption 
of CECL and upon later purchases of PCD assets generally would not 
reduce the banking organization's earnings, retained earnings, or 
CET1 capital.
    \11\ Deferred tax assets are a result of deductible temporary 
differences and carryforwards which may result in a decrease in 
taxes payable in future years.
    \12\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 
(FDIC). Any amount of ALLL greater than the 1.25 percent limit is 
deducted from standardized total risk-weighted assets. 12 CFR 
3.20(d)(3) (OCC); 12 CFR 217.20(d)(3) (Board); 12 CFR 324.20(d)(3) 
(FDIC).
    \13\ A banking organization is an advanced approaches banking 
organization if it has consolidated assets of at least $250 billion 
or if it has consolidated on-balance sheet foreign exposures of at 
least $10 billion, or if it is a subsidiary of a depository 
institution, bank holding company, savings and loan holding company, 
or intermediate holding company that is an advanced approaches 
banking organization. See 12 CFR 3.100 (OCC); 12 CFR 217.100 
(Board); 12 CFR 324.100 (FDIC). On October 31, 2018, the OCC and the 
Board issued a notice of proposed rulemaking that would modify the 
definition of an advanced approaches banking organization. On 
November 20, 2018, the FDIC issued a substantively identical notice 
of proposed rulemaking.
    \14\ An advanced approaches banking organization is considered 
to have completed the parallel run process once it has completed the 
advanced approaches qualification process and received notification 
from its primary federal regulator pursuant to section 121(d) of 
subpart E of the capital rule. See 12 CFR 3.121(d) (OCC); 12 CFR 
217.121(d) (Board); 12 CFR 324.121(d) (FDIC).
    \15\ 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR 217.10(c)(3)(ii) 
(Board); and 12 CFR 324.10(c)(3)(ii) (FDIC).
---------------------------------------------------------------------------

II. Summary of the Proposal

A. Proposed Revisions to the Capital Rule To Reflect the Change in U.S. 
GAAP

    The agencies proposed to amend the capital rule to identify which 
credit loss allowances under the new accounting standard would be 
eligible for inclusion in a banking organization's regulatory 
capital.\16\ In particular, the proposal would have added allowance for 
credit losses (ACL) as a newly defined term in the capital rule. As 
proposed, ACL would have included credit loss allowances related to 
financial assets measured at amortized cost, except for allowances for 
PCD assets. ACL would have been eligible for inclusion in a banking 
organization's tier 2 capital subject to the current limit for 
including ALLL in tier 2 capital under the capital rule's standardized 
approach.
---------------------------------------------------------------------------

    \16\ Note that under section 37 of the Federal Deposit Insurance 
Act, the accounting principles applicable to reports or statements 
required to be filed with the agencies by all insured depository 
institutions must be uniform and consistent with U.S. GAAP. See 12 
U.S.C. 1831n(a)(2)(A). Consistency in reporting under the statute 
would be addressed by the agencies' proposed CECL revisions to the 
Call Report pursuant to the Paperwork Reduction Act. See 83 FR 49160 
(September 28, 2018).
---------------------------------------------------------------------------

    Further, the agencies proposed to revise the capital rule, as 
applicable to an advanced approaches banking organization that has 
adopted CECL, and that has completed the parallel run process, to align 
the definition of eligible credit reserves with the definition of ACL 
in the proposal. The proposal would have retained the current limit for 
eligible credit reserves in tier 2 capital. The proposal also would 
have provided a separate capital treatment for allowances associated 
with AFS debt securities and PCD assets that would have applied to all 
banking organizations upon adoption of ASU 2016-13.

[[Page 4225]]

    Before the agencies issued the proposal, some banking organizations 
expressed concerns about the difficulty in capital planning due to the 
uncertainty about the economic environment at the time of CECL 
adoption. This is largely because CECL requires banking organizations 
to consider current and future expected economic conditions to estimate 
allowances and these conditions will not be known until closer to a 
banking organization's CECL adoption date. Therefore, 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. To address these 
concerns, the agencies proposed to provide a banking organization with 
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 proposal also would have revised regulatory capital disclosure 
requirements \17\ that would have applied to certain banking 
organizations following their adoption of CECL.\18\ The proposal would 
have provided conforming amendments to the agencies' other regulations 
that refer to credit loss allowances to reflect the implementation of 
ASU 2016-13. In particular, the proposal would have amended the Board's 
and FDIC's company-run stress testing rules to require a banking 
organization that has adopted CECL to include its CECL provisions as 
part of its stress testing projections beginning with the 2020 stress 
test cycle.
---------------------------------------------------------------------------

    \17\ For the agencies' proposed revisions to regulatory reports 
to address the revised accounting for credit losses under ASU 2016-
13, including CECL, see 83 FR 49160 (September 28, 2018).
    \18\ For certain banking organizations, sections 63 and 173 of 
the capital rule requires disclosure of items such as capital 
structure, capital adequacy, credit risk, and credit risk 
mitigation.
---------------------------------------------------------------------------

    Finally, the proposal would not have changed the limit of 1.25 
percent of risk-weighted assets governing the amount of allowances 
eligible for inclusion in tier 2 capital. The agencies stated in the 
proposal that they would intend to monitor the effects of this limit on 
regulatory capital and bank lending practices. This ongoing monitoring 
would have included the review of data, including data provided by 
banking organizations, and would have assisted the agencies in 
determining whether any further change to the capital rule's treatment 
of ACL might be warranted in the future.

B. Summary of Comments Received on the Proposal

    The agencies received 25 comment letters from banking 
organizations, trade associations, public interest groups, and 
individuals. Most commenters supported the agencies' proposal to 
provide an option to elect temporary regulatory capital relief as 
banking organizations adopt CECL. Most commenters also requested 
further additional measures for addressing CECL's effect on regulatory 
capital. Many commenters supported the agencies' proposal to provide a 
three-year transition provision to phase-in CECL's day-one effect on a 
banking organization's regulatory capital ratios, with most of these 
commenters favoring a longer five-year transition period. Some 
commenters offered targeted recommendations regarding implementation of 
a transition provision that would phase in CECL's effect in periods 
after CECL's day-one implementation. Several commenters requested that, 
instead of a transition provision, the agencies should provide a 
temporary neutralization adjustment of CET1 capital while further 
consideration of the effect of CECL is undertaken. Many of these and 
other commenters asserted that any transitional provision would be 
inadequate and preferred neutralizing the effect of CECL on regulatory 
capital ratios by either adjusting the CET1 capital calculation or 
revising the overall capital requirements.
    One commenter requested that the agencies expand the scope of 
credit loss allowances eligible for inclusion in a banking 
organization's tier 2 capital to permit banking organizations to 
include post-acquisition allowances for PCD assets when PCD assets 
exceed a materiality threshold. Some commenters requested that the 
agencies increase or remove the current limit on allowances includable 
in tier 2 capital. Several commenters raised concerns with the proposed 
schedule for incorporation of CECL provisions into the stress testing 
cycle. One commenter requested that CECL's implementation in the stress 
testing cycle align with the proposal's three-year transition provision 
to allow time for industry standard practices to converge. Other 
commenters raised concerns and requested guidance in connection with 
how CECL interacts with regulatory capital and stress testing. Many of 
these commenters requested that the agencies undertake additional 
``cost-benefit'' and impact studies to assess CECL's effect on the 
regulatory capital of banking organizations of various sizes and under 
varying economic conditions over time. Numerous commenters urged the 
agencies to delay CECL's implementation until additional impact studies 
have been completed, and to intervene on commenters' behalf with the 
FASB to revise the accounting treatment of credit losses.

III. Final Rule

A. Changes to the Capital Rule To Reflect the Change in U.S. GAAP

1. Introduction of Adjusted Allowances for Credit Losses as a New 
Defined Term
    The agencies are adopting as final the proposal for the credit loss 
allowances that would have been eligible for inclusion in tier 2 
capital, with one non-substantive change from the proposal with respect 
to terminology. The final rule includes a new term, adjusted allowances 
for credit losses (AACL), which replaces the term ACL, as used in the 
proposal. The agencies believe that the term AACL for regulatory 
capital purposes minimizes confusion, as its meaning is different from 
the term ACL used in applicable accounting standards. The term 
allowance for credit losses as used by the FASB in ASU 2016-13 applies 
to both financial assets and AFS debt securities. In contrast, the term 
ACL as used in the proposal for regulatory capital purposes excludes 
credit loss allowances on PCD assets and AFS debt securities. 
Consistent with the proposal and as described in the following 
sections, the AACL definition includes only those allowances that have 
been charged against earnings or retained earnings. Under the final 
rule, the term AACL, rather than ALLL, will apply to a banking 
organization that has adopted CECL. Consistent with the treatment of 
ALLL under the capital rule's standardized approach, amounts of AACL 
are eligible for inclusion in a banking organization's tier 2 capital 
up to 1.25 percent of the banking organization's standardized total 
risk-weighted assets (excluding its standardized market risk-weighted 
assets, if applicable).
    AACL covers a broader range of financial assets than ALLL under the 
incurred loss methodology. Under the standardized approach of the 
capital rule, ALLL includes valuation allowances that have been 
established through a charge against earnings to cover estimated credit 
losses on loans or other extensions of credit as determined in 
accordance with U.S. GAAP. Under CECL, credit loss allowances represent 
an accounting valuation account, measured as the difference between the 
financial assets' amortized cost basis

[[Page 4226]]

and the amount expected to be collected on the financial assets (i.e., 
lifetime credit losses). Thus, AACL includes allowances for expected 
credit losses on HTM debt securities and lessors' net investments in 
leases that have been established to adjust these assets to amounts 
expected to be collected, as determined in accordance with U.S. GAAP. 
AACL also includes allowances for expected credit losses on off-balance 
sheet credit exposures not accounted for as insurance, as determined in 
accordance with U.S. GAAP. As described below, however, credit loss 
allowances related to AFS debt securities and PCD assets are not 
included in the definition of AACL. As with the definition of ALLL, 
AACL under the final rule also excludes allocated transfer risk 
reserves.
2. Definition of Carrying Value
    The agencies are adopting as final, without change from the 
proposal, the definition of carrying value. Under the final rule, 
carrying value means, with respect to an asset, the value of the asset 
on the balance sheet as determined in accordance with U.S. GAAP. 
Furthermore, carrying value under the final rule provides that, for all 
assets other than AFS debt securities and PCD assets, the carrying 
value is not reduced by any associated credit loss allowance. The 
agencies did not receive comments on the proposed treatment of AFS debt 
securities and, as discussed below, received one comment on the 
proposed treatment of PCD assets.
    Current accounting standards require a banking organization to make 
an individual assessment of each of its AFS debt securities and take a 
direct write-down for credit losses when such a security is other-than-
temporarily impaired. The amount of the write-down is charged against 
earnings, which reduces CET1 capital and results in a reduction in the 
same amount to the carrying value of the AFS debt security. ASU 2016-13 
revises the accounting for credit impairment of AFS debt securities by 
requiring banking organizations to determine whether a decline in fair 
value below an AFS debt security's amortized cost resulted from a 
credit loss, and to record any such credit impairment through earnings 
with a corresponding allowance. Similar to the current regulatory 
treatment of credit-related losses for other-than-temporary impairment, 
under the final rule all credit losses recognized on AFS debt 
securities will correspondingly affect CET1 capital and reduce the 
carrying value of the AFS debt security. Since the carrying value of an 
AFS debt security is its fair value, which would reflect any credit 
impairment, credit loss allowances for AFS debt securities required 
under the new accounting standard are not eligible for inclusion in a 
banking organization's tier 2 capital.
    Under the new accounting standard, PCD assets are acquired 
individual financial assets (or acquired groups of financial assets 
with shared risk characteristics) that, as of the date of acquisition 
and as determined by an acquirer's assessment, have experienced a more-
than-insignificant deterioration in credit quality since origination. 
The new accounting standard will require a banking organization to 
estimate expected credit losses that are embedded in the purchase price 
of a PCD asset and recognize these amounts as an allowance as of the 
date of acquisition. As such, the initial allowance amount for a PCD 
asset recorded on a banking organization's balance sheet will not be 
established through a charge to earnings. Including in tier 2 capital 
allowances that have not been charged against earnings would diminish 
the quality of regulatory capital. Post-acquisition increases in 
allowances for PCD assets will be established through a charge against 
earnings.
    Accordingly, the agencies are maintaining the requirement that 
valuation allowances be fully charged against earnings in order to be 
eligible for inclusion in tier 2 capital. The agencies also are 
clarifying that valuation allowances that are charged to retained 
earnings in accordance with U.S. GAAP (i.e., the allowances required at 
CECL adoption) are eligible for inclusion in tier 2 capital. The final 
rule, however, excludes PCD allowances from being included in tier 2 
capital; rather, a banking organization calculates the carrying value 
of PCD assets net of allowances. This treatment of PCD assets, in 
effect, will reduce a banking organization's standardized total risk-
weighted assets, similar to the proposed treatment for credit loss 
allowances for AFS debt securities. One commenter recommended that the 
agencies require or provide an option to allow banking organizations to 
use a bifurcated approach for the treatment of PCD assets whereby a 
banking organization could include post-acquisition allowances on PCD 
assets in tier 2 capital when the banking organization's PCD balances 
exceed a materiality threshold. The commenter was concerned that the 
proposed approach could discourage banking organizations from acquiring 
distressed firms if the post-acquisition allowance were not includable 
in regulatory capital. As noted in the proposal, the agencies are 
concerned that a bifurcated approach could create undue complexity and 
burden for banking organizations and believe that requiring banking 
organizations to calculate the carrying value of PCD assets net of 
allowances appropriately accounts for post-acquisition allowances in 
the calculation of regulatory capital.

B. CECL Transition Provision

    In the preamble of the proposal, the agencies noted that some 
banking organizations have expressed concerns about the difficulty in 
capital planning due to the uncertainty about the economic environment 
at the time of CECL adoption. This is largely because CECL requires 
banking organizations to consider current and future expected economic 
conditions to estimate allowances and banking organizations will not 
understand these conditions until closer to their CECL adoption date. 
Therefore, it is possible that despite adequate planning to prepare for 
the implementation of CECL, unexpected economic conditions at the time 
of CECL adoption could result in higher-than-anticipated increases in 
allowances. To address these concerns, the agencies proposed to provide 
banking organizations with the option to phase in over a three-year 
period the day-one adverse effects of CECL on their regulatory capital 
ratios.
    Several commenters requested that the agencies extend the 
transition period from three years to five years or longer. In 
particular, commenters noted that effects of CECL on bank capital in 
the aggregate and for individual banks cannot be precisely estimated 
prior to actual adoption of CECL. Some commenters noted that a five-
year transition would help to soften any adverse effects due to 
unresolved interpretive issues with respect to CECL implementation. 
According to one commenter, a five-year transition period would allow a 
bank to transition through the vast majority of the expected life of 
its loan portfolio. One commenter argued that a three-year transition 
period might not be sufficient for firms that enter a stress 
environment at the time of CECL implementation. One commenter supported 
the proposed three-year transition period.
    A few commenters asked the agencies to adopt a dynamic transition 
provision, whereby a banking organization could calculate and phase-in 
additional capital differences between CECL and the current incurred 
loss methodology (or a proxy for the incurred loss methodology) for any 
new credit loss allowances generated throughout the entire transition 
period, rather than just at initial adoption of CECL. Several

[[Page 4227]]

commenters requested that the agencies delay the implementation of CECL 
or neutralize the impact of CECL on regulatory capital until further 
study of the effect of CECL has been completed.
    The agencies note that ASU 2016-13 was issued in 2016 and becomes 
mandatory in 2020 at the earliest for banking organizations that are 
U.S. SEC filers, which provides banking organizations with at least a 
four year period to plan for CECL implementation. Most banking 
organizations are not required to adopt CECL until 2021 or 2022, 
according to the U.S. GAAP effective dates for ASU 2016-13.
    While the exact effects of CECL adoption may not be known 
currently, a banking organization will be able to better understand and 
estimate the macroeconomic factors that may affect the size of the 
banking organization's one-time adjustment to CECL closer to its CECL 
adoption date. The agencies recognize that these estimates may change, 
and the three-year transition period may help mitigate capital 
volatility due to refinements in CECL allowance estimates that may be 
made as a banking organization approaches its CECL adoption date.
    The agencies continue to view the period of at least four years 
that banking organizations will have had to plan for the implementation 
of CECL, combined with the proposed three-year transition period, as a 
sufficient amount of time for a banking organization to adjust and 
adapt to any immediate adverse effects on regulatory capital ratios 
resulting from CECL adoption. Further, the agencies considered adopting 
a dynamic or ongoing transition approach, but believe, that relative to 
the straight-line approach, it would create unnecessary complexity and 
operational burden. Therefore, the agencies are finalizing the three-
year transition period as proposed.
    As previously stated, many commenters requested that the agencies 
take action to ``neutralize'' the effect of CECL on regulatory capital 
on a more permanent basis. The agencies acknowledge that because 
changes in allowances may reduce retained earnings, which is a key 
component of CET1 capital, CECL implementation could affect regulatory 
capital levels at some banking organizations. In defining regulatory 
capital, the agencies have long sought to recognize the ability of 
capital to absorb losses and to support the ongoing operations of a 
banking organization. The agencies recognize commenters' concerns with 
CECL and intend to closely monitor the effects of CECL on regulatory 
capital and bank lending practices as the standard is implemented.
1. Election of the Optional CECL Transition Provision
    Under the final rule, a banking organization that experiences a 
reduction in retained earnings due to CECL adoption as of the beginning 
of the fiscal year in which the banking organization adopts CECL may 
elect to phase in the regulatory capital impact of adopting CECL over a 
three-year transition period (electing banking organization). An 
electing banking organization is required to begin applying the CECL 
transition provision as of the electing banking organization's CECL 
adoption date. An electing banking organization must indicate in its 
Consolidated Reports of Condition and Income (Call Report) or Form FR 
Y-9C, as applicable, its election to use the CECL transition provision, 
by reporting the amounts in the affected line items of the regulatory 
capital schedule, adjusted for the transition provisions, beginning in 
the regulatory report for the quarter in which it first reports its 
credit loss allowances as measured under CECL. For example, an electing 
banking organization would adjust the amount of retained earnings it 
reports in Schedule RC-R of the Call Report or Schedule HC-R of the 
Form FR Y-9C to incorporate the transition provision.
    A banking organization that does not elect to use the CECL 
transition provision in the regulatory report for the quarter in which 
it first reports its credit loss allowances as measured under CECL will 
not be permitted to make an election in subsequent reporting periods 
and will be required to reflect the full effect of CECL in its 
regulatory capital ratios beginning as of the banking organization's 
CECL adoption date. For example, a banking organization that adopts 
CECL as of January 1, 2020, and does not elect to use the CECL 
transition provision in its regulatory report as of March 31, 2020, 
must include the full effects of CECL adoption in its regulatory 
capital schedule as of March 31, 2020, and will not be permitted to use 
the CECL transition provision in any subsequent reporting period.
    A banking organization that initially elects to use the CECL 
transition provision in the final rule, but opts out of the transition 
provision in a subsequent reporting period, will not be permitted to 
resume using the transition provision at a later date within the three-
year transition period. A banking organization may opt out of applying 
the transition provision by reflecting the full impact of CECL on 
regulatory capital in Schedule RC-R of the Call Report or Schedule HC-R 
of Form FR Y-9C, as applicable.
    A depository institution holding company subject to the Board's 
capital rule and each of its subsidiary institutions is eligible to 
make a CECL transition provision election independent of one another.
2. Mechanics of the CECL Transition Provision
    Under the final rule, an electing banking organization must 
calculate transitional amounts for the following items: Retained 
earnings, temporary difference DTAs, and credit loss allowances 
eligible for inclusion in regulatory capital. For each of these items, 
the transitional amount is equal to the difference between the electing 
banking organization's closing balance sheet amount for the fiscal 
year-end immediately prior to its adoption of CECL (pre-CECL amount) 
and its balance sheet amount as of the beginning of the fiscal year in 
which it adopts CECL (post-CECL amount). An electing banking 
organization must phase in the transitional amounts to its regulatory 
capital calculations over a three-year period beginning the first day 
of the fiscal year in which the electing banking organization adopts 
CECL.
    An electing banking organization's ``CECL transitional amount'' is 
equal to the difference between its pre-CECL and post-CECL amounts of 
retained earnings (CECL transitional amount). An electing banking 
organization's ``DTA transitional amount'' is equal to the difference 
between its pre-CECL and post-CECL amounts of temporary difference 
DTAs. An electing banking organization's AACL transitional amount is 
equal to the difference between its pre-CECL amount of ALLL and its 
post-CECL amount of AACL (AACL transitional amount).
    Under the standardized approach, an electing banking organization 
must phase in over the three-year transition period its CECL 
transitional amount, DTA transitional amount, and AACL transitional 
amount. The electing banking organization also must phase in over the 
transition period the CECL transitional amount to its average total 
consolidated assets for purposes of calculating its tier 1 leverage 
ratio. Each transitional amount must be phased in over the transition 
period on a straight-line basis.
    When calculating regulatory capital ratios during the first year of 
an electing banking organization's CECL adoption date, the organization 
must phase in 25 percent of the transitional amounts. The electing 
banking organization would

[[Page 4228]]

phase in an additional 25 percent of the transitional amounts over each 
of the next two years so that a banking organization would have phased 
in 75 percent of the day-one adverse effects of adopting CECL during 
year three. At the beginning of the fourth year, the banking 
organization would have completely reflected in regulatory capital the 
day-one effects of CECL. See Table 1 below for further details:

                   Table 1--CECL Transition Amounts To Apply to Regulatory Capital Components
----------------------------------------------------------------------------------------------------------------
                                                                      Year 1          Year 2          Year 3
----------------------------------------------------------------------------------------------------------------
Increase retained earnings and average total consolidated assets             75%             50%             25%
 by the following percentages of the CECL transitional amount...
Decrease temporary difference DTAs by the following percentages
 of the DTA transitional amount.
Decrease AACL by the following percentages of the AACL
 transitional amount.
----------------------------------------------------------------------------------------------------------------

    For example, consider a hypothetical electing banking organization 
that has a CECL effective date of January 1, 2020, and a 21 percent tax 
rate. On the closing balance sheet date immediately prior to adopting 
CECL (i.e., December 31, 2019), the electing banking organization has 
$10 million in retained earnings and $1 million of ALLL. On the opening 
balance sheet date immediately after adopting CECL (i.e., January 1, 
2020), the electing banking organization has $1.2 million of AACL. The 
electing banking organization would recognize the adoption of CECL by 
recording an increase to AACL (credit) of $200,000, with an offsetting 
increase in temporary difference DTAs of $42,000 (debit), and a 
reduction in beginning retained earnings of $158,000 (debit). For each 
of the quarterly reporting periods in year 1 of the transition period 
(i.e., 2020), the electing banking organization would increase both 
retained earnings and average total consolidated assets by $118,500 
($158,000 x 75 percent), decrease temporary difference DTAs by $31,500 
($42,000 x 75 percent), and decrease AACL by $150,000 ($200,000 x 75 
percent) for purposes of calculating its regulatory capital ratios. The 
remainder of the transitional amounts will be transitioned into 
regulatory capital according to the schedule provided in Table 2.

                            Table 2--Example of a CECL Transition Provision Schedule
----------------------------------------------------------------------------------------------------------------
                                                   Transitional     Transitional amounts applicable during each
                                                      amounts              year of the transition period
                                                 ---------------------------------------------------------------
                  In thousands                                       Column B        Column C        Column D
                                                     Column A    -----------------------------------------------
                                                                   Year 1 at 75%   Year 2 at 50%   Year 3 at 25%
----------------------------------------------------------------------------------------------------------------
Increase retained earnings and average total                $158         $118.50             $79          $39.50
 consolidated assets by the CECL transitional
 amount.........................................
Decrease temporary difference DTAs by the DTA                 42           31.50              21           10.50
 transitional amount............................
Decrease AACL by the ACL transitional amount....             200             150             100              50
----------------------------------------------------------------------------------------------------------------

    The result of the CECL transition provision for an electing banking 
organization is to phase in the effect of the adoption of CECL in its 
regulatory capital ratios in a uniform manner. The phase-in of the CECL 
transitional amount to retained earnings will mitigate the decrease in 
an electing banking organization's CET1 capital resulting from CECL 
adoption, and would increase the levels at which the capital rule's 
CET1 capital deduction thresholds would be triggered. The DTA 
transitional amount phases in the amount of an electing banking 
organization's temporary difference DTAs subject to the CET1 capital 
deduction thresholds and the amount of temporary difference DTAs 
included in risk-weighted assets. The AACL transitional amount phases 
in the amount of AACL that an electing banking organization may include 
in its tier 2 capital up to the limit of 1.25 percent of its 
standardized total risk-weighted assets (excluding its standardized 
market risk-weighted assets, if applicable). Finally, for purposes of 
an electing banking organization's tier 1 leverage ratio calculation, 
the addition of the CECL transitional amount to average total 
consolidated assets offsets the immediate decrease that would otherwise 
occur as a result of the adjustments to credit loss allowances and 
temporary difference DTAs resulting from the adoption of CECL.
    Notwithstanding the CECL transition provision, all other aspects of 
the capital rule will continue to apply. Thus, all regulatory capital 
adjustments and deductions will continue to apply and an electing 
banking organization will continue to be limited in the amount of 
credit loss allowances that it could include in its tier 2 capital.\19\
---------------------------------------------------------------------------

    \19\ 12 CFR 3.10(c)(3)(ii)(B), 12 CFR 3.20(d)(3) (OCC); 12 CFR 
217.10(c)(3)(ii)(B), 12 CFR 217.20(d)(3) (Board); 12 CFR 
324.10(c)(3)(ii)(B), 12 CFR 324.20(d)(3) (FDIC).
---------------------------------------------------------------------------

3. Business Combinations
    Under the proposal, during the period in which an electing banking 
organization is using the CECL transition provision, if the electing 
banking organization acquired another banking organization through a 
business combination (as determined under U.S. GAAP), the electing 
banking organization would have been able to continue to make use of 
its transitional amounts based on its calculation as of the date of its 
adoption of CECL. Business combinations would have covered mergers, 
acquisitions, and transactions in which two existing unrelated entities 
combine into a newly created third entity.
    One commenter requested that the agencies allow transitional 
amounts of an acquired electing banking organization to flow through to 
the resulting banking organization. The agencies do not believe that 
such a treatment is appropriate, as any assets acquired and liabilities 
assumed will be

[[Page 4229]]

measured at fair value as of the acquisition date under U.S. GAAP, and 
therefore the capital relief is no longer relevant for the acquired 
banking organizations. Thus, under the final rule, any transitional 
amounts of an acquired electing banking organization will not be 
eligible for inclusion in the calculation of the regulatory capital 
ratios of the resulting banking organization.\20\
---------------------------------------------------------------------------

    \20\ For combinations of banking organizations under common 
control the transitional amounts of each banking organization could 
be combined in the calculation of the regulatory capital ratios of 
the resulting banking organization.
---------------------------------------------------------------------------

4. Supervisory Oversight
    For purposes of determining whether an electing banking 
organization is in compliance with its regulatory capital requirements 
(including capital buffer and prompt corrective action (PCA) 
requirements), the agencies will use the electing banking 
organization's regulatory capital ratios as adjusted by the CECL 
transition provision. Through the supervisory process, the agencies 
will continue to examine banking organizations' credit loss estimates 
and allowance balances regardless of whether the banking organization 
has elected to use the CECL transition provision. In addition, the 
agencies may examine whether electing banking organizations will have 
adequate amounts of capital at the expiration of their CECL transition 
provision period.

C. Additional Requirements for Advanced Approaches Banking 
Organizations

    Under the capital rule, an advanced approaches banking organization 
\21\ that has completed the parallel run process must include in its 
advanced-approaches-adjusted total capital any amount of eligible 
credit reserves that exceeds its regulatory expected credit losses to 
the extent that the excess reserve amount does not exceed 0.6 percent 
of the banking organization's credit risk-weighted assets.\22\ 
Consistent with the proposal, the agencies are revising the definition 
of eligible credit reserves to align with the definition of AACL in the 
final rule. Under the final rule, for an advanced approaches banking 
organization that has completed the parallel run process and that has 
adopted CECL, eligible credit reserves includes all general allowances 
that have been established through a charge against earnings or 
retained earnings to cover expected credit losses associated with on- 
or off-balance sheet wholesale and retail exposures, including AACL 
associated with such exposures. Similar to the current definition of 
eligible credit reserves, the definition of eligible credit reserves 
applicable to banking organizations that have adopted CECL excludes 
allocated transfer risk reserves established pursuant to 12 U.S.C. 
3904. In addition, the revised eligible credit reserves definition 
excludes expected credit losses on PCD assets and expected credit 
losses on AFS debt securities, and other specific reserves created 
against recognized losses. The definition of eligible credit reserves 
remains unchanged for an advanced approaches banking organization that 
has not adopted CECL.
---------------------------------------------------------------------------

    \21\ See footnote 13.
    \22\ 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR 217.10(c)(3)(ii) 
(Board); and 12 CFR 324.10(c)(3)(ii) (FDIC).
---------------------------------------------------------------------------

    For purposes of the supplementary leverage ratio (SLR), which is 
applicable to all advanced approaches banking organizations, the final 
rule maintains the current definition of total leverage exposure. Thus, 
total leverage exposure continues to include, among other items, the 
balance sheet carrying value of such a banking organization's on-
balance sheet assets less amounts deducted from tier 1 capital.

                 Table 3--CECL Transition Amounts for Advanced Approaches Banking Organizations
----------------------------------------------------------------------------------------------------------------
                                                                      Year 1          Year 2          Year 3
----------------------------------------------------------------------------------------------------------------
Increase total leverage exposure for SLR by the following                    75%             50%             25%
 percentages of the CECL transitional amount....................
Decrease eligible credit reserves by the following percentages
 of the eligible credit reserves transitional amount.
----------------------------------------------------------------------------------------------------------------

    An advanced approaches banking organization that has completed the 
parallel run process is required to deduct the amount of expected 
credit losses that exceeds its eligible credit reserves (ECR shortfall) 
from its CET1 capital. Due to this requirement, an advanced approaches 
banking organization's CET1 capital immediately after CECL adoption may 
be greater than its CET1 capital immediately before CECL adoption.\23\ 
This is because, for a banking organization with an ECR shortfall, an 
increase in allowances resulting from CECL adoption can have a dual 
impact on CET1 capital: (1) A reduction in retained earnings (partially 
offset by DTAs) that may be less than (2) a concurrent reduction in the 
ECR shortfall amount because while the CET1 capital reduction is net of 
DTAs, the reduction in ECR shortfall is not net of DTAs. The agencies 
were concerned that the use of the CECL transition provision could 
provide an undue benefit to a banking organization that has an ECR 
shortfall prior to its adoption of CECL and could undermine an 
objective of the CECL transition provision to provide relief to banking 
organizations that experience an immediate adverse impact to regulatory 
capital as a result of CECL adoption. The agencies received one comment 
that supported this aspect of the proposal, for the stated reasons 
above. The final rule, therefore, limits the CECL transitional amount 
that such an electing advanced approaches banking organization can 
include in retained earnings.
---------------------------------------------------------------------------

    \23\ See 12 CFR 3.121(d) (OCC); 12 CFR 217.121(d) (Board); and 
12 CFR 324.121(d) (FDIC).
---------------------------------------------------------------------------

    Under the final rule and consistent with the proposal, an electing 
advanced approaches banking organization that (1) has completed the 
parallel run process, (2) has an ECR shortfall immediately prior to the 
adoption of CECL, and (3) would have an increase in CET1 capital as of 
the beginning of the fiscal year in which it adopts CECL after 
including the first year portion of the CECL transitional amount, is 
required to decrease its CECL transitional amount by its DTA 
transitional amount.\24\
---------------------------------------------------------------------------

    \24\ For example, if a banking organization has completed the 
parallel run process, has an ECR shortfall immediately prior to the 
adoption of CECL, would have an increase in CET1 capital as of the 
beginning of the fiscal year in which it adopts CECL after including 
the first year portion of the CECL transitional amount, and, upon 
the adoption of CECL, records an increase in AACL (credit) of 
$200,000, with an offsetting increase in temporary difference DTAs 
of $42,000 (debit), and a reduction in beginning retained earnings 
of $158,000 (debit), then that banking organization would have a 
CECL transitional amount of $116,000 ($158,000-$42,000), and would 
apply $87,000 in year 1, $58,000 in year 2, $29,000 in year 3 of the 
transition period.

---------------------------------------------------------------------------

[[Page 4230]]

D. Disclosures and Regulatory Reporting

    One commenter urged the agencies to consider requiring banking 
organizations to disclose the full effect of CECL. The agencies 
recognize that increased disclosures help to provide users of financial 
reports with additional information, but doing so can increase burden 
for banking organizations. The agencies have proposed revisions to 
certain regulatory reporting forms to reflect the changes in U.S. GAAP 
provided by ASU 2016-13 in a separate proposal.\25\ The proposed 
revisions would specify how electing banking organizations report their 
transitional amounts for the affected line items in Schedule RC-R of 
the Call Report and Schedule HC-R of the FR Y-9C.\26\ In addition, the 
agencies intend to update instructions for certain other reporting 
forms, including the FFIEC 101, to reflect the three-year CECL 
transition period.
---------------------------------------------------------------------------

    \25\ 83 FR 49160 (September 28, 2018).
    \26\ On November 20, 2018, the agencies issued a notice of 
proposed rulemaking to implement Section 201 of the Economic Growth, 
Regulatory Relief, and Consumer Protection Act. Under the proposal, 
depository institutions and depository institution holding companies 
that have less than $10 billion in total consolidated assets, meet 
risk-based qualifying criteria, and have a community bank leverage 
ratio (as defined in the proposal) of greater than 9 percent would 
be eligible to opt into a community bank leverage ratio (CBLR) 
framework. Banking organizations that use the CBLR framework would 
no longer be required to complete the current Schedule RC-R of the 
Call Report or Schedule HC-R of the FR Y-9C, as applicable. The 
agencies anticipate issuing for public comment a proposed 
alternative capital reporting schedule for such banking 
organizations.
---------------------------------------------------------------------------

    In addition, under the final rule, banking organizations subject to 
the disclosure requirements in section 63 of the capital rule (i.e., 
banking organizations with total consolidated assets of $50 billion or 
more) would be required to update their disclosures to reflect the 
adoption of CECL. Such banking organizations would be required to 
disclose AACL instead of ALLL after CECL adoption.
    For advanced approaches banking organizations, the final rule makes 
similar revisions to Tables 2, 3, and 5 in section 173 \27\ of the 
capital rule to reflect the adoption of CECL. In addition, the final 
rule revises those tables requiring electing advanced approaches 
banking organizations to disclose two sets of regulatory capital 
ratios. One set would reflect the banking organization's capital ratios 
with the CECL transition provision and the other set would reflect the 
banking organization's capital ratios on a fully phased-in basis.
---------------------------------------------------------------------------

    \27\ 12 CFR 3.173 (OCC); 12 CFR 217.173 (Board); 12 CFR 324.173 
(FDIC).
---------------------------------------------------------------------------

E. Conforming Changes to Other Agency Regulations

1. OCC Regulations
    In addition to the capital rule, seven provisions in other OCC 
regulations refer to ALLL, as defined in 12 CFR part 3, in calculating 
various statutory or regulatory limits. Specifically, ALLL is used in 
calculating limits on holdings of certain investment securities (12 CFR 
part 1); limits on ownership of bankers' bank stock (12 CFR 5.20); 
limits on investments in bank premises (12 CFR 5.37); limits on leasing 
of personal property (12 CFR 23.4); limits on certain community 
development investments (12 CFR 24.4); lending limits (12 CFR part 32); 
and, limits on improvements to other real estate owned (12 CFR part 34, 
subpart E).
    The OCC has revised the calculations used in six of those sections 
that currently reference ALLL to reference AACL, once a banking 
organization has adopted the FASB standard. The revisions ensure that 
banking organizations will not experience a material decrease in any of 
the affected limits due to the adoption of CECL. With respect to limits 
on improvements to other real estate owned in 12 CFR part 34, subpart 
E, the OCC is withdrawing the proposed revision in anticipation of 
making comprehensive revisions to that subpart in the near future.
    The OCC also made conforming edits to the terminology used in the 
stress testing regulation at 12 CFR part 46 to incorporate the new CECL 
methodology. Some commenters requested that the OCC mirror the Board 
and FDIC in adopting detailed CECL-specific provisions and effective 
dates in part 46. The OCC currently addresses these details through 
instructions to the stress tests and will continue to do so through 
amending the instructions instead of through rulemaking.
2. Board Regulations
    Certain Board regulations reflect the current practice of banking 
organizations establishing an ALLL under the incurred loss methodology 
to cover estimated credit losses on loans, lease financing receivables, 
or other extensions of credit. As discussed above, banking 
organizations that adopt CECL will hold AACL to cover expected credit 
losses on a broader array of financial assets than covered by the ALLL. 
As a result, the final rule makes conforming changes to those other 
regulations.
    Specifically, the final rule amends the definition of ``capital 
stock and surplus'' in the Board's Regulation H, 12 CFR part 208, to 
include the balance of a member bank's AACL. Similarly, the final rule 
incorporates ``allowance for credit losses'' in the definition of 
``capital stock and surplus'' in the Board's Regulation K, 12 CFR part 
211; Regulation W, 12 CFR part 223; and Regulation Y, 12 CFR part 225. 
A related change will be made to the definition of unimpaired capital 
and unimpaired surplus in the Board's Regulation O, 12 CFR part 215.
    The final rule makes a similar change to the Board's Regulation K 
relating to the establishment of allocated transfer risk reserve 
(ATRR). Specifically, the final rule replaces, for CECL adopters, all 
references to ALLL, in the section relating to the accounting treatment 
of ATRR, with AACL.
    The final rule incorporates technical amendments to section 225.127 
of the Board's Regulation Y to provide corrected reference citations to 
sections of Regulation Y that have been revised and renumbered.
    Finally, the final rule amends the supervisory stress testing and 
company-run stress testing rules in the Board's Regulation YY, 12 CFR 
part 252, to address the changes made in U.S. GAAP following the 
issuance of ASU 2016-13.\28\ Several commenters requested that the 
Board delay incorporation of CECL into the Comprehensive Capital 
Analysis and Review (CCAR) given CECL's operational and governance 
challenges. In particular, some commenters requested a delay for 
incorporating CECL until the 2021 stress testing cycle, while one 
commenter requested a delay until the year following a banking 
organization's adoption of CECL and another commenter requested a delay 
until an industry standard practice regarding incorporating CECL into 
CCAR emerges. One commenter requested that the Board phase in CECL into 
CCAR over three years, consistent with the proposed transition 
provision.
---------------------------------------------------------------------------

    \28\ See 12 CFR part 252, subparts B, E, and F.
---------------------------------------------------------------------------

    The Board notes that the proposal did not address the incorporation 
of CECL into CCAR and instead addressed the incorporation of CECL into 
the Board's stress testing rules. As a result, the Board is addressing 
the comments in the context of incorporation of CECL in its stress 
testing rules. While CCAR and the capital plan rule are outside of the 
scope of this rulemaking, the Board is carefully considering the effect 
of CECL on key aspects of CCAR, including its assessment of a firm's 
post-stress capital

[[Page 4231]]

adequacy and its supervision of a firm's internal capital planning 
practices. The Board will look to provide more information on the 
intersection of CECL and CCAR.
    The Board acknowledges that incorporating CECL on a forward-looking 
basis in the Board's supervisory stress testing and company-run stress 
testing rules involves additional challenges apart from those involved 
in financial reporting. However, in order to address the purpose of the 
stress testing rules--to assess whether banking organizations have 
sufficient capital to absorb losses as a result of adverse economic 
conditions--the Board expects that banking organizations implementing 
CECL for financial reporting will also reflect CECL in their stress 
testing processes starting in the same year. Otherwise, stress test 
projections may not reflect how the banking organizations' balance 
sheets and regulatory capital ratios would evolve during stressful 
conditions. The Board also believes an extended phase-in of CECL into 
the stress test rules would introduce undue complexity in the 
requirements. Such a transition would require estimating regulatory 
capital ratios under both the incurred loss method and CECL for three 
annual stress testing exercises.
    For these reasons, the Board is finalizing the initial application 
of CECL in stress testing as proposed. As such, under the final rule, a 
banking organization that has adopted CECL will be required to include 
its provision for credit losses beginning in the 2020 stress test 
cycle, which would include provisions calculated under ASU 2016-13, 
instead of its provision for loan and lease losses, in its stress 
testing methodologies and data and information required to be submitted 
to the Board and that the disclosure of the results of those stress 
tests includes estimates of those provisions. To promote comparability 
of stress test results across firms, for the 2018 and 2019 stress test 
cycles, a banking organization will continue to use its provision for 
loan and lease losses, as would be calculated under the incurred loss 
methodology, even if the firm adopts CECL in 2019. Finally, under the 
final rule, a banking organization that does not adopt CECL until 2021 
will not be required to include its provision for credit losses for 
these purposes until the 2021 stress test cycle. The following table 
describes the stress test cycles in which a banking organization will 
be required to use its provision for credit losses instead of the 
provision for loan and lease losses, based on the varying dates of 
adoption of ASU 2016-13.

                      Table 4--Summary of Use of Provisions in 2019-2021 Stress Test Cycles
----------------------------------------------------------------------------------------------------------------
    Year of adoption of ASU 2016-13      2019 Stress test cycle   2020 Stress test cycle  2021 Stress test cycle
----------------------------------------------------------------------------------------------------------------
2019..................................  Provision for loan and   Provision for credit     Provision for credit
                                         lease losses.            losses.                  losses.
2020..................................  Provision for loan and   Provision for credit     Provision for credit
                                         lease losses.            losses.                  losses.
2021..................................  Provision for loan and   Provision for loan and   Provision for credit
                                         lease losses.            lease losses.            losses.
----------------------------------------------------------------------------------------------------------------

    In addition, beginning in the 2020 stress test cycle, a banking 
organization that has adopted CECL will be required under the final 
rule to incorporate the effects of the maintenance of AACL when 
estimating the impact on pro forma regulatory capital levels and pro 
forma capital ratios.
3. FDIC Regulations
    The final rule makes conforming amendments to references to 
provisions or allowances for loan and lease losses in the FDIC's 
regulations. Specifically, the final rule would replace, for CECL 
adopters, all references to ALLL with AACL (as applicable) in the 
FDIC's capital rule codified at 12 CFR part 324, including in the 
definitions of ``identified losses'' and ``standardized total risk-
weighted assets.'' The final rule also makes conforming changes to the 
FDIC regulations in 12 CFR parts 327 and 347 by replacing references to 
ALLL with allowance for credit losses (as determined in accordance with 
U.S. GAAP). The final rule also makes conforming changes to 12 CFR part 
390 by adding provision for credit losses. Finally, consistent with the 
changes to the Board's stress testing rules, the final rule makes 
similar conforming changes to the FDIC's stress testing rules codified 
at 12 CFR part 325.

IV. Long Term Considerations With CECL

    Several commenters recommended that the agencies neutralize the 
effects of CECL in the capital rule as an alternative to the proposed 
phase-in approach. Several commenters requested that the agencies study 
CECL's effect on regulatory capital, including CECL's effects over the 
economic cycle; review the regulatory capital requirements with respect 
to allowances; and conduct cost-benefit analysis of CECL's 
implementation on small and medium-sized banking organizations. One 
commenter requested that the agencies ask the FASB to delay 
implementation of CECL until a study is conducted on CECL's effects on 
the overall stability of the banking sector and on the availability, 
accessibility, and affordability of credit. One commenter asked the 
agencies to engage with the FASB to make changes to CECL to minimize 
its effects on regulatory capital. Another commenter asked the agencies 
to consider issuing interpretative industry guidelines that will help 
narrow the range of potential practices. Additional comments were 
received on the interaction between CECL and stress testing. One 
commenter asked that any decision the Board makes regarding 
implementation of CECL to depository institution holding companies that 
are engaged in significant insurance activities reflect the Building 
Block Approach to capital.
    The agencies recognize commenters' concerns about CECL's effects on 
regulatory capital. The agencies are committed to closely monitoring 
the effects of CECL on regulatory capital and bank lending practices. 
This ongoing monitoring will include the review of data provided by 
banking organizations, as well as information observed from banking 
organizations' parallel runs before their adoption of CECL and their 
implementation of CECL.

V. Regulatory Analyses

A. Paperwork Reduction Act

    Certain provisions of the final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501-3521) (PRA). In accordance with 
the requirements of the PRA, the agencies may not conduct or sponsor, 
and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The agencies reviewed the final rule 
and determined that the final rule revises certain

[[Page 4232]]

disclosure and reporting requirements that have been previously cleared 
by the OMB under various control numbers. The agencies will revise and 
extend these information collections for three years. The information 
collections for the disclosure requirements contained in the final 
rulemaking have been submitted by the OCC and FDIC to OMB for review 
and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and 
section 1320.11 of the OMB's implementing regulations (5 CFR part 
1320). The Board reviewed the final rule under the authority delegated 
to the Board by OMB.
Disclosure Burden--Advanced Approaches Banking Organizations
Current Actions
    Section 173 of the capital rule requires that advanced approaches 
banking organizations publicly disclose capital-related information as 
provided in a series of 13 tables. For advanced approaches banking 
organizations, the agencies made revisions to Tables 2, 3, and 5 in 
section 173 of the capital rule to reflect the adoption of CECL. In 
addition, the agencies made revisions to those tables for electing 
advanced approaches banking organizations to disclose two sets of 
regulatory capital ratios. One set reflects such banking organization's 
capital ratios with the CECL transition provision and the other set 
reflects the banking organization's capital ratios on a fully phased-in 
basis. This aspect of the final rule affects the below-listed 
information collections.
    The changes in the disclosure requirements to Tables 2, 3, and 5 in 
section 173 of the capital rule result in an increase in the average 
hours per response per agency of 48 hours for the initial setup burden. 
In addition, the changes in the disclosure requirements to Tables 2, 3, 
and 5 in section 173 of the capital rule result in an increase in the 
average hours per response per agency of 6 hours for ongoing 
(quarterly) burden.\29\
---------------------------------------------------------------------------

    \29\ In an effort to provide transparency, the total cumulative 
burden for each agency is shown. In addition, as stated in the 
Notice of Proposed Rulemaking, Simplifications to the Capital Rule 
Pursuant to the Economic Growth and Regulatory Paperwork Reduction 
Act of 1996, 82 FR 49984 (October 27, 2017), in order to be 
consistent across the agencies, the agencies are also applying a 
conforming methodology for calculating the burden estimates.
---------------------------------------------------------------------------

Revision, With Extension, of the Following Information Collections
OCC
    Title of Information Collection: Risk-Based Capital Standards: 
Advanced Capital Adequacy Framework.
    Frequency: Quarterly, annual.
    Affected Public: Businesses or other for-profit.
    Respondents: National banks, state member banks, state nonmember 
banks, and state and federal savings associations.
    OMB control number: 1557-0318.
    Estimated number of respondents: 1,365 (of which 18 are advanced 
approaches institutions).
    Estimated average hours per response:

    Minimum Capital Ratios

    Recordkeeping (Ongoing)--16.

    Standardized Approach

    Recordkeeping (Initial setup)--122.
    Recordkeeping (Ongoing)--20.
    Disclosure (Initial setup)--226.25.
    Disclosure (Ongoing quarterly)--131.25.

    Advanced Approach

    Recordkeeping (Initial setup)--460.
    Recordkeeping (Ongoing)--540.77.
    Recordkeeping (Ongoing quarterly)--20.
    Disclosure (Initial setup)--328.
    Disclosure (Ongoing)--5.78.
    Disclosure (Ongoing quarterly)--41.
    Revisions estimated annual burden: 432 hours.
    Estimated annual burden hours: 1,088 hours initial setup, 66,017 
hours for ongoing.
Board
    Title of Information Collection: Recordkeeping and Disclosure 
Requirements Associated with Regulation Q.
    Frequency: Quarterly, annual.
    Affected Public: Businesses or other for-profit.
    Respondents: State member banks (SMBs), bank holding companies 
(BHCs), U.S. intermediate holding companies (IHCs), savings and loan 
holding companies (SLHCs), and global systemically important bank 
holding companies (GSIBs).
    Legal authorization and confidentiality: This information 
collection is authorized by section 38(o) of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o(c)), section 908 of the International 
Lending Supervision Act of 1983 (12 U.S.C. 3907(a)(1)), section 9(6) of 
the Federal Reserve Act (12 U.S.C. 324), and section 5(c) of the Bank 
Holding Company Act (12 U.S.C. 1844(c)). The obligation to respond to 
this information collection is mandatory. If a respondent considers the 
information to be trade secrets and/or privileged such information 
could be withheld from the public under the authority of the Freedom of 
Information Act (5 U.S.C. 552(b)(4)). Additionally, to the extent that 
such information may be contained in an examination report such 
information could also be withheld from the public (5 U.S.C. 
552(b)(8)).
    Agency form number: FR Q.
    OMB control number: 7100-0313.
    Estimated number of respondents: 1,431 (of which 17 are advanced 
approaches institutions).
    Estimated average hours per response:

    Minimum Capital Ratios

    Recordkeeping (Ongoing)--16.

    Standardized Approach

    Recordkeeping (Initial setup)--122.
    Recordkeeping (Ongoing)--20.
    Disclosure (Initial setup)--226.25.
    Disclosure (Ongoing quarterly)--131.25.

    Advanced Approach

    Recordkeeping (Initial setup)--460.
    Recordkeeping (Ongoing)--540.77.
    Recordkeeping (Ongoing quarterly)--20.
    Disclosure (Initial setup)--328.
    Disclosure (Ongoing)--5.78.
    Disclosure (Ongoing quarterly)--41.
    Disclosure (Table 13 quarterly)--5.

    Risk-based Capital Surcharge for GSIBs

    Recordkeeping (Ongoing)--0.5.
    Revisions estimated annual burden: 456 hours.
    Estimated annual burden hours: 1,136 hours initial setup, 78,591 
hours for ongoing.
FDIC
    Title of Information Collection: Regulatory Capital Rule.
    Frequency: Quarterly, annual.
    Affected Public: Businesses or other for-profit.
    Respondents: State nonmember banks, state savings associations, and 
certain subsidiaries of those entities.
    OMB control number: 3064-0153.
    Estimated number of respondents: 3,575 (of which 2 are advanced 
approaches institutions).
    Estimated average hours per response:

    Minimum Capital Ratios

    Recordkeeping (Ongoing)--16.

    Standardized Approach

    Recordkeeping (Initial setup)--122.
    Recordkeeping (Ongoing)--20.
    Disclosure (Initial setup)--226.25.
    Disclosure (Ongoing quarterly)--131.25.

    Advanced Approach

    Recordkeeping (Initial setup)--460.
    Recordkeeping (Ongoing)--540.77.
    Recordkeeping (Ongoing quarterly)--20.
    Disclosure (Initial setup)--328.
    Disclosure (Ongoing)--5.78.

[[Page 4233]]

    Disclosure (Ongoing quarterly)--41.
    Revisions estimated annual burden: 96 hours.
    Estimated annual burden hours: 1,136 hours initial setup, 130,806 
hours for ongoing.
Reporting Burden--FFIEC and Board Forms
Current Actions
    The agencies also plan to make changes to certain FFIEC and Board 
reporting forms and/or their related instructions as a result of the 
issuance of ASU 2016-13. In particular, the forms and/or related 
instructions for the following FFIEC reports could be affected: 
Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031, 
FFIEC 041, and FFIEC 051; OMB No. 1557-0081, 7100-0036, and 3064-0052), 
Report of Assets and Liabilities of U.S. Branches and Agencies of 
Foreign Banks (FFIEC 002; OMB No. 7100-0032), Report of Assets and 
Liabilities of a Non-U.S. Branch that is Managed or Controlled by a 
U.S. Branch or Agency of a Foreign (Non-U.S.) Bank (FFIEC 002S; OMB No. 
7100-0032), Foreign Branch Report of Condition (FFIEC 030; OMB No. 
1557-0099, 7100-0071, and 3064-0011), Abbreviated Foreign Branch Report 
of Condition (FFIEC 030S; OMB No. 1557-0099, 7100-0071, and 3064-0011), 
and Regulatory Capital Reporting for Institutions Subject to the 
Advanced Capital Adequacy Framework (FFIEC 101; OMB No. 1557-0239, 
7100-0319, and 3064-0159). As a result of the proposal, a separate 60-
day Federal Register notice \30\ addressed these changes to the FFIEC 
forms and/or instructions. These changes will also be addressed in 
separate 30-day Federal Register notice.
---------------------------------------------------------------------------

    \30\ 83 FR 49160 (September 28, 2018).
---------------------------------------------------------------------------

    The forms and/or related instructions for the following Board 
reports could be affected: Financial Statements of Foreign Subsidiaries 
of U.S. Banking Organizations (FR 2314; OMB No. 7100-0073), Domestic 
Finance Company Report of Consolidated Assets and Liabilities (FR 2248; 
OMB No. 7100-0005), Weekly Report of Selected Assets and Liabilities of 
Domestically Chartered Commercial Banks and U.S. Branches and Agencies 
of Foreign Banks (FR 2644; OMB No. 7100-0075), Consolidated Report of 
Condition and Income for Edge and Agreement Corporations (FR 2886b; OMB 
No. 7100-0086), Financial Statements of U.S. Nonbank Subsidiaries Held 
by Foreign Banking Organizations (FR Y-7N; 7100-0125), Consolidated 
Financial Statements for Holding Companies (FR Y-9C; OMB No. 7100-
0128), Parent Company Only Financial Statements for Large Holding 
Companies (FR Y-9LP; OMB No. 7100-0128), Parent Company Only Financial 
Statements for Small Holding Companies (FR Y-9SP; OMB No. 7100-0128), 
Financial Statements of U.S. Nonbank Subsidiaries of U.S. Holding 
Companies (FR Y-11; OMB No. 7100-0244), Capital Assessments and Stress 
Testing (FR Y-14; OMB No. 7100-0341), and Banking Organization Systemic 
Risk Report (FR Y-15; OMB No. 7100- 0352). These changes to the FFIEC 
forms and/or instructions as well as the Board forms and/or 
instructions would be addressed in separate Federal Register notices.

B. Regulatory Flexibility Act

    OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), 
requires an agency, in connection with a final rule, to prepare an 
initial regulatory flexibility analysis describing the impact of the 
rule on small entities (defined by the Small Business Administration 
(SBA) for purposes of the RFA to include commercial banks and savings 
institutions with total assets of $550 million or less and trust 
companies with total revenue of $38.5 million or less) or to certify 
that the final rule would not have a significant economic impact on a 
substantial number of small entities. As of December 31, 2017, the OCC 
supervised 886 small entities. The final rule would apply to all OCC 
supervised entities, and thus potentially affects a substantial number 
of small entities. To determine whether a final rule would have a 
significant effect on those small entities, the OCC considers whether 
the economic impact associated with the final rule is greater than or 
equal to either 5 percent of a small entity's total annual salaries and 
benefits or 2.5 percent of a small entity's total non-interest expense. 
The OCC estimates the final rule would not generate any costs for 
affected small entities. The final rule may generate a benefit for 
those small entities that elect the transition. The benefit ranges 
between approximately $4,800 to $30,000 per electing small entity, 
depending on the year the entity adopts the transition and the amount 
of increase in the entity's loan loss reserves. This estimate is based 
on the potential savings to small entities from not needing to raise 
additional capital related to CECL implementation due to the regulatory 
capital transition. The estimated benefit is not significant in 
relation to the measures described above. Therefore, the OCC certifies 
that the final rule would not have a significant economic impact on a 
substantial number of OCC-supervised small entities.
    Board: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
generally requires that, in connection with a proposed rulemaking, an 
agency prepare and make available for public comment an initial 
regulatory flexibility analysis (IRFA).\31\ The Board solicited public 
comment on this proposal in a notice of proposed rulemaking \32\ and 
has since considered the potential impact of this proposal on small 
entities in accordance with section 604 of the RFA. Based on the 
Board's analysis, and for the reasons stated below, the Board believes 
the final rule will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \31\ See 5 U.S.C. 603, 604 and 605.
    \32\ 83 FR 22312 (May 14, 2018).
---------------------------------------------------------------------------

    The RFA requires an agency to prepare a final regulatory 
flexibility analysis (FRFA) unless the agency certifies that the rule 
will not, if promulgated, have a significant economic impact on a 
substantial number of small entities.\33\ The FRFA must contain: (1) A 
statement of the need for, and objectives of, the rule; (2) a statement 
of the significant issues raised by the public comments in response to 
the IRFA, a statement of the agency's assessment of such issues, and a 
statement of any changes made in the proposed rule as a result of such 
comments; (3) the response of the agency to any comments filed by the 
Chief Counsel for Advocacy of the Small Business Administration in 
response to the proposed rule, and a detailed statement of any changes 
made to the proposed rule in the final rule as a result of the 
comments; (4) a description of an estimate of the number of small 
entities to which the rule will apply or an explanation of why no such 
estimate is available; (5) a description of the projected reporting, 
recordkeeping and other compliance requirements of the rule, including 
an estimate of the classes of small entities which will be subject to 
the requirement and the type of professional skills necessary for 
preparation of the report or record; and (6) a description of the steps 
the agency has taken to minimize the significant economic impact on 
small entities, including a statement for selecting or rejecting the 
other significant

[[Page 4234]]

alternatives to the rule considered by the agency.
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    \33\ Under regulations issued by the Small Business 
Administration, a small entity includes a depository institution, 
bank holding company, or savings and loan holding company with total 
assets of $550 million or less and trust companies with total assets 
of $38.5 million or less. As of December 31, 2017, there were 
approximately 3,384 small bank holding companies, 230 small savings 
and loan holding companies, and 559 small state member banks.
---------------------------------------------------------------------------

    Statement of the need for, and objectives of, the final rule.
    As discussed in detail above, the final rule identifies which 
credit loss allowances under ASU 2016-13 are eligible for inclusion in 
regulatory capital and provides banking organizations an optional 
three-year transition period to phase in the immediate effect on 
regulatory capital that may result from adoption of this accounting 
standard (ASU 2016-13). The final rule also makes conforming amendments 
to other regulations.
    The Board has authority under the International Lending Supervision 
Act (ILSA) \34\ and the PCA provisions of the Federal Deposit Insurance 
Act \35\ to establish regulatory capital requirements for the 
institutions it regulates. For example, ILSA directs each Federal 
banking agency to cause banking institutions to achieve and maintain 
adequate capital by establishing minimum capital requirements as well 
as by other means that the agency deems appropriate.\36\ The PCA 
provisions of the Federal Deposit Insurance Act direct each Federal 
banking agency to specify, for each relevant capital measure, the level 
at which an insured depository institution is well capitalized, 
adequately capitalized, undercapitalized, and significantly 
undercapitalized.\37\ In addition, the Board has authority to establish 
regulatory capital standards for bank holding companies under ILSA \38\ 
and the Bank Holding Company Act \39\ and for savings and loan holding 
companies under the Home Owners Loan Act.\40\
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 3901-3911.
    \35\ 12 U.S.C. 1831o.
    \36\ 12 U.S.C. 3907(a)(1).
    \37\ 12 U.S.C. 1831o(c)(2).
    \38\ See 12 U.S.C. 3907.
    \39\ See 12 U.S.C. 1844.
    \40\ See 12 U.S.C. 1467a(g)(1).
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    All banking organizations will be required to adopt ASU 2016-13, 
which will likely result in an increase in credit loss allowances. An 
increase in a banking organization's credit loss allowances will reduce 
the firm's retained earnings and therefore its CET1 capital. The final 
rule identifies those credit loss allowances under ASU 2016-13 that are 
eligible for inclusion in regulatory capital. Further, the final rule 
introduces a three-year transition period, which allows a banking 
organization to phase in the immediate impact of adoption of ASU 2016-
13. During the transition period, a banking organization that elects to 
use the phase-in will report higher capital than it otherwise would 
under the current capital rule.
    The final rule also makes conforming amendments to certain of the 
Board's other regulations. In particular, certain other regulations of 
the Board include a definition of ``capital stock and surplus,'' which 
reflect the current practice of banking organizations establishing ALLL 
to cover estimated credit losses on loans, lease financing receivables, 
or other extensions of credit. The final rule allows banking 
organizations that are subject to these regulations to also include in 
the definition of ``capital stock and surplus'' those credit loss 
allowances under ASU 2016-13 that would be eligible for inclusion in 
regulatory capital.
    A discussion of the significant issues raised by public comments in 
response to the IRFA, and the Board's response to any comments filed by 
the Chief Counsel for Advocacy of the Small Business Administration in 
response to the proposed rule.
    The Board did not receive any comments on the IRFA that it 
published in connection with the proposal. In addition, the Chief 
Counsel for Advocacy of the Small Business Administration did not file 
any comments in response to the proposal. Accordingly, no changes were 
made to the proposal as a result of RFA-related comments.
    Description and estimate of the number of small entities to which 
the rule will apply.
    Most aspects of the final rule apply to all state member banks, as 
well as generally all bank holding companies and savings and loan 
holding companies that are subject to the Board's capital rule. As of 
December 31, 2017, there were approximately 3,384 bank holding 
companies, 230 savings and loan holding companies, and 559 state member 
banks that qualified as small entities. The final rule revises the 
Board's capital rule, which applies to bank holding companies and 
savings and loan holding companies with greater than $1 billion in 
total assets. Therefore, virtually all bank holding companies and 
savings and loan holding companies that would be subject to the final 
rule do not qualify as small entities. The final rule will apply to 
state member banks that qualify as small entities.
    Description of the projected reporting, recordkeeping and other 
compliance requirements of the rule.
    The final rule will impose some small recordkeeping, reporting, and 
compliance requirements on Board-regulated institutions. Specifically, 
the final rule would change certain disclosure requirements for 
advanced-approaches institutions, which include banking organizations 
with consolidated assets of at least $250 billion or consolidated on-
balance sheet foreign exposures of at least $10 billion or if the 
banking organization. These requirements would not apply to small 
entities, and there are no other expected compliance requirements 
associated with the final rule. The agencies are separately updating 
the relevant reporting forms.
    Description of the steps taken to minimize any significant economic 
impact on small entities.
    The Board does not believe that the final rule will impose 
significant costs on small entities. With respect to Board-regulated 
institutions that do qualify as small entities, the final rule's 
revisions to the Board's capital rule should allow institutions to 
include additional credit loss allowances into regulatory capital than 
they otherwise would be able to under the current capital rule. 
However, there is uncertainty as to the amount of the benefit that 
institutions will accrue, given that the impact of CECL will depend on 
the economic environment at the time a firm adopts CECL. The Board does 
not believe there are significant alternatives to the final rule that 
have less economic impact on small entities but the Board is committed 
to closely monitoring the effects of CECL on regulatory capital and 
bank lending practices. In addition, the Board does not believe that 
the final rule duplicates, overlaps, or conflicts with any other 
Federal Rules.
    FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
generally requires an agency, in connection with a final rule, to 
prepare and make available a final regulatory flexibility analysis that 
describes the impact of a final rule on small entities.\41\ However, a 
regulatory flexibility analysis is not required if the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. The Small Business Administration 
(SBA) has defined ``small entities'' to include banking organizations 
with total assets of less than or equal to $550 million who are 
independently owned and operated or owned by a holding company with 
less than $550 million in total assets.\42\
---------------------------------------------------------------------------

    \41\ 5 U.S.C. 601 et seq.
    \42\ The SBA defines a small banking organization as having $550 
million or less in assets, where ``a financial institution's assets 
are determined by averaging the assets reported on its four 
quarterly financial statements for the preceding year.'' See 13 CFR 
121.201 (as amended, effective December 2, 2014). ``SBA counts the 
receipts, employees, or other measure of size of the concern whose 
size is at issue and all of its domestic and foreign affiliates.'' 
See 13 CFR 121.103. Following these regulations, the FDIC uses a 
covered entity's affiliated and acquired assets, averaged over the 
preceding four quarters, to determine whether the covered entity is 
``small'' for the purposes of RFA.

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[[Page 4235]]

Description of Need and Policy Objectives
    In June 2016, the FASB issued ASU 2016-13, which revises the 
accounting for credit losses under U.S. GAAP. CECL differs from the 
incurred loss methodology currently implemented by institutions in 
several key respects. CECL requires banking organizations to recognize 
lifetime expected credit losses for financial assets measured at 
amortized cost, not just those credit losses that are probable of 
having been incurred as of the reporting date. In addition to 
maintaining the current requirement for banking organizations to 
consider past events and current conditions, CECL requires the 
incorporation of reasonable and supportable forecasts in developing an 
estimate of lifetime expected credit losses.
    Upon adoption of CECL, a banking organization will record a one-
time adjustment to its allowance for credit losses as of the beginning 
of its fiscal year of adoption equal to the difference, if any, between 
the amount of credit loss allowances required under the incurred loss 
methodology and the amount of credit loss allowances required under the 
CECL methodology. Changes to retained earnings, DTAs, and credit loss 
allowances affect a banking organization's calculation of regulatory 
capital.\43\ To address changes made in U.S. GAAP following the FASB's 
issuance of ASU 2106-13, the FDIC is amending its capital rule \44\ to 
give banking organizations the option to phase in the immediate, 
potentially adverse effects of CECL adoption over a three-year period.
---------------------------------------------------------------------------

    \43\ 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12 CFR 324.20 
(FDIC).
    \44\ Under section 37 of the Federal Deposit Insurance Act, the 
accounting principles applicable to reports or statements required 
to be filed with the agencies by all insured depository institutions 
must be uniform and consistent with U.S. GAAP. See 12 U.S.C. 
1831n(a)(2)(A).
---------------------------------------------------------------------------

Description of the Final Rule
    A description of the rule is presented Section III: Final Rule. 
Please refer to it for further information.
Other Federal Rules
    The FDIC has not identified any likely duplication, overlap, and/or 
potential conflicts between the final rule and any other federal rule.
Response to Comments Regarding the Regulatory Flexibility Act
    The FDIC did not receive any public comments on the supporting 
information it presented in the Regulatory Flexibility Act section of 
the Notice of Proposed Rulemaking.
    The Agencies did receive public comments on the proposed 
rulemaking. A summary of those comments, and the Agencies' 
consideration of them, is presented in Section II.B. The vast majority 
of public comments on the NPR related to the implementation of CECL 
rather than the economic impacts of the proposed transition period.
    Several commenters requested that the FDIC increase the transition 
period from the proposed three-year transition in the NPR to five years 
in order to develop and validate the necessary data and models. One 
commenter opposed expansion of the transition period, claiming that the 
three-year phase in is already generous given the advance notice banks 
have had of the new accounting standards, and that the new capital 
requirements reflect the socially optimal level of capital. Upon 
consideration of the comments, the FDIC has chosen to maintain the 
proposed three-year transition period. The FDIC believes that the 
three-year CECL transition provision will adequately address banking 
organizations' challenges in capital planning for CECL implementation, 
while reducing the likelihood of a coincidence of rising capital 
requirements during a future downturn in the business cycle which could 
reduce the benefits of the rule and have deleterious effects on lending 
activity .
Economic Impacts on Small Entities
    The final rule applies to all FDIC-supervised small entities. The 
FDIC supervises 3,575 depository institutions, of which 2,763 are 
defined as small banking entities by the terms of the RFA.\45\ However, 
the number of small entities that will elect to utilize the three-year 
transition schedule is difficult to estimate with available 
information. Utilization will likely depend on an institution's 
business model, the preferences of senior management or ownership, the 
assets held by the institution, and reasonable expectations of future 
macroeconomic conditions, among other things.
---------------------------------------------------------------------------

    \45\ Call Report data, June 30 2018.
---------------------------------------------------------------------------

    As described in the overview section, the adoption of CECL will 
result in earlier recognition of credit losses when compared to the 
current incurred loss methodology. Therefore, the rule is intended to 
provide relief to covered institutions for certain adverse effects 
associated with the timing difference in provisioning for such losses, 
should they elect to utilize the option that this rule provides. The 
final rule will benefit small, FDIC-supervised institutions that adopt 
the three year transition schedule by allowing them to phase-in any 
needed increases in capital associated with the implementation of CECL 
over that time, thereby reducing costs by the time value of money. It 
is difficult to accurately estimate the potential benefit for small 
institutions with available data because it depends on the assets held 
by small institutions, their provision activity, future economic 
conditions, and the decisions of senior management. However, 
institutions will ultimately need to raise the same amount of capital 
whether they use the phase-in option or not. The rule allows banks to 
spread the cost of raising additional capital over three years rather 
than incurring that cost right away, should they choose to do so. The 
value of that option depends on the discount rate, which is generally 
assumed to be near the risk-free interest rate, so the benefits of the 
rule are unlikely to constitute a significant economic impact.
    The final rule would pose some small regulatory costs for small, 
FDIC-supervised institutions that opt to utilize the three-year 
transition schedule. However, the small regulatory costs associated 
with implementing the three-year transition schedule will be less than 
the benefits posed by utilizing the schedule for those institutions 
that opt to utilize it.
Alternatives Considered
    As an alternative to the final rule, the FDIC considered allowing 
CECL to go into effect with no accompanying action by the financial 
regulators. However, this alternative would likely result in higher 
costs for small entities. The FDIC considered a longer transition 
period of up to five years, as some commenters requested. While this 
alternative might reduce the costs of adopting CECL more than the 
proposed alternative, it also heightens the risk of capital increases 
coinciding with a potential future downturn in the business cycle. The 
coincidence of rising capital requirements during a future downturn in 
the business cycle could reduce the benefits of the proposed rule and 
have deleterious effects on lending activity.
    A few commenters suggested allowing dynamic amortization whereby 
differences in allowances from an incurred loss estimate after the 
effective date could be amortized over the

[[Page 4236]]

remaining transition period in order to address the volatility in the 
CECL allowance from a downturn in economic forecasts. The FDIC 
responded that, while there may be difficulties for capital planning 
due to the uncertainty of the economic environment at the time of CECL 
adoption, the extended transition period will mitigate any day-one 
adverse effects. The straight-line approach adopted by the FDIC avoids 
unnecessary complexity and operational burdens.
Certification
    Based on the information presented above, the FDIC certifies that 
this rule will not have a significant economic impact on a substantial 
number of small entities.

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \46\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The agencies have sought to present 
the final rule in a simple and straightforward manner and did not 
receive any comments on the use of plain language.
---------------------------------------------------------------------------

    \46\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
---------------------------------------------------------------------------

D. OCC Unfunded Mandates Reform Act of 1995

    The OCC analyzed the final rule under the factors set forth in the 
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this 
analysis, the OCC considered whether the final rule includes a Federal 
mandate that may result in the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted for inflation). The OCC has 
determined that this final rule would not result in expenditures by 
State, local, and Tribal governments, or the private sector, of $100 
million or more in any one year. Accordingly, the OCC has not prepared 
a written statement to accompany this proposal.

E. Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA)

    For purposes of SBREFA, the OMB makes a determination as to whether 
a final rule constitutes a ``major'' rule. If a rule is deemed a 
``major rule'' by the OMB, SBREFA generally provides that the rule may 
not take effect until at least 60 days following its publication.\47\ 
Notwithstanding any potential delay related to the OMB's pending 
determination, banking organizations subject to this final rule will be 
permitted to elect to comply with it as of January 1, 2019.
---------------------------------------------------------------------------

    \47\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    SBREFA defines a ``major rule'' as any rule that the Administrator 
of the Office of Information and Regulatory Affairs of the OMB finds 
has resulted in or is likely to result in--(A) an annual effect on the 
economy of $100,000,000 or more; (B) a major increase in costs or 
prices for consumers, individual industries, Federal, State, or local 
government agencies or geographic regions, or (C) significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic and export 
markets.\48\ As required by SBREFA, the agencies will submit the final 
rule and other appropriate reports to Congress and the Government 
Accountability Office for review.
---------------------------------------------------------------------------

    \48\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

F. Administrative Procedure Act and Riegle Community Development and 
Regulatory Improvement Act of 1994

    The Administrative Procedure Act (APA) requires that a final rule 
be published in the Federal Register no less than 30 days before its 
effective date unless, among other exceptions, the final rule relieves 
a restriction.\49\
---------------------------------------------------------------------------

    \49\ 5 U.S.C. 553(d)(1).
---------------------------------------------------------------------------

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (``RCDRIA''),\50\ in determining the 
effective date and administrative compliance requirements for a new 
regulation that imposes additional reporting, disclosure, or other 
requirements on insured depository institutions, each Federal banking 
agency must consider, consistent with principles of safety and 
soundness and the public interest, any administrative burdens that such 
regulations would place on depository institutions, including small 
depository institutions, and customers of depository institutions, as 
well as the benefits of such regulations. In addition, section 302(b) 
of RCDRIA requires new regulations and amendments to regulations that 
impose additional reporting, disclosure, or other new requirements on 
insured depository institutions generally to take effect on the first 
day of a calendar quarter that begins on or after the date on which the 
regulations are published in final form.\51\
---------------------------------------------------------------------------

    \50\ 12 U.S.C. 4802(a).
    \51\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    In accordance with these provisions, the agencies considered any 
administrative burdens, as well as benefits, that the final rule would 
place on depository institutions and their customers in determining the 
effective date and administrative compliance requirements of the final 
rule. The final rule provides regulatory capital transition provisions 
for banking organizations that early adopt CECL beginning after 
December 15, 2018, and thus relieves those banking organizations from 
compliance with certain stricter capital requirements that would 
otherwise have taken effect on January 1, 2019. However, the final rule 
also imposes new disclosure requirements for institutions that opt to 
utilize the three-year transition period. Therefore, in accordance with 
RCDRIA and the APA, the final rule will be effective no earlier than 
the first day of the calendar quarter following 30 days from the date 
on which the final rule is published in the Federal Register. 
Notwithstanding, banking organizations subject to this final rule will 
be permitted to elect to comply with it as of January 1, 2019.

List of Subjects

12 CFR Part 1

    Banks, Banking, National banks, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 3

    Administrative practice and procedure, Capital, National banks, 
Risk.

12 CFR Part 5

    Administrative practice and procedure, Federal savings 
associations, National banks, Reporting and recordkeeping requirements, 
Securities.

12 CFR Part 23

    Banks, Banking, National banks, Lease financing transactions, 
Leasing, Reporting and recordkeeping requirements.

12 CFR Part 24

    Affordable housing, Community development, Credit, Investments, 
Economic development and job creation, Low- and moderate-income areas, 
Low and moderate income housing, National banks, Public welfare 
investments, Reporting and recordkeeping requirements, Rural areas, 
Small businesses, Tax credit investments.

12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

[[Page 4237]]

12 CFR Part 46

    Banking, Banks, Capital, Disclosures, National banks, 
Recordkeeping, Risk, Savings associations, Stress test.

12 CFR Part 208

    Confidential business information, Crime, Currency, Federal Reserve 
System, Mortgages, Reporting and recordkeeping requirements, 
Securities.

12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 215

    Credit, Penalties, Reporting and recordkeeping requirements.

12 CFR Part 217

    Administrative practice and procedure, Banks, Banking, Capital, 
Federal Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Risk, Securities.

12 CFR Part 223

    Banks, Banking, Federal Reserve System.

12 CFR Part 225

    Administrative practice and procedure, Banks, Banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 252

    Administrative practice and procedure, Banks, Banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 324

    Administrative practice and procedure, Banks, Banking, Reporting 
and recordkeeping requirements, Savings associations.

12 CFR Part 325

    Banks, Banking, Reporting and recordkeeping requirements.

12 CFR Part 327

    Bank deposit insurance, Banks, Banking, Savings associations.

12 CFR Part 347

    Authority delegation (Government agencies), Bank deposit insurance, 
Banks, Banking, Credit, Foreign banking, Investments, Reporting and 
recordkeeping requirements, U.S. Investments abroad.

12 CFR Part 390

    Administrative practice and procedure, Advertising, Aged, Civil 
rights, Conflict of interests, Credit, Crime, Equal employment 
opportunity, Fair housing, Government employees, Individuals with 
disabilities, Reporting and recordkeeping requirements, Savings 
associations.

Office of the Comptroller of the Currency

    For the reasons set out in the joint preamble, the OCC proposes to 
amend 12 CFR chapter I as follows.

PART 1--INVESTMENT SECURITIES

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 24 (Seventh), and 12 
U.S.C. 93a.


0
2. Section 1.2 is amended by revising paragraph (a)(2) to read as 
follows:


Sec.  1.2  Definitions.

    (a) * * *
    (2) The balance of a bank's allowance for loan and lease losses or 
adjusted allowances for credit losses, as applicable, not included in 
the bank's Tier 2 capital, for purposes of the calculation of risk-
based capital described in paragraph (a)(1) of this section, as 
reported in the bank's Call Report.
* * * * *

PART 3--CAPITAL ADEQUACY STANDARDS

0
3. The authority citation for part 3 continues to read as follows:

    Authority:  12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).


0
4. Section 3.2 is amended by:
0
a. Adding in alphabetical order a definition for ``adjusted allowances 
for credit losses (AACL)'';
0
b. Revising the definitions of ``carrying value'';
0
c. Adding in alphabetical order a definition for ``current expected 
credit losses (CECL)''; and
0
d. Revising the definition for ``eligible credit reserves'' and 
paragraph (2) of the definition of ``standardized total risk-weighted 
assets''.
    The additions and revisions read as follows:


Sec.  3.2  Definitions.

* * * * *
    Adjusted allowances for credit losses (AACL) means, with respect to 
a national bank or Federal savings association that has adopted CECL, 
valuation allowances that have been established through a charge 
against earnings or retained earnings for expected credit losses on 
financial assets measured at amortized cost and a lessor's net 
investment in leases that have been established to reduce the amortized 
cost basis of the assets to amounts expected to be collected as 
determined in accordance with GAAP. For purposes of this part, adjusted 
allowances for credit losses include allowances for expected credit 
losses on off-balance sheet credit exposures not accounted for as 
insurance as determined in accordance with GAAP. Adjusted allowances 
for credit losses exclude ``allocated transfer risk reserves'' and 
allowances created that reflect credit losses on purchased credit 
deteriorated assets and available-for-sale debt securities.
* * * * *
    Carrying value means, with respect to an asset, the value of the 
asset on the balance sheet of the national bank or Federal savings 
association as determined in accordance with GAAP. For all assets other 
than available-for-sale debt securities or purchased credit 
deteriorated assets, the carrying value is not reduced by any 
associated credit loss allowance that is determined in accordance with 
GAAP.
* * * * *
    Current Expected Credit Losses (CECL) means the current expected 
credit losses methodology under GAAP.
* * * * *
    Eligible credit reserves means:
    (1) For a national bank or Federal savings association that has not 
adopted CECL, all general allowances that have been established through 
a charge against earnings to cover estimated credit losses associated 
with on- or off-balance sheet wholesale and retail exposures, including 
the ALLL associated with such exposures, but excluding allocated 
transfer risk reserves established pursuant to 12 U.S.C. 3904 and other 
specific reserves created against recognized losses; and
    (2) For a national bank or Federal savings association that has 
adopted CECL, all general allowances that have been established through 
a charge against earnings or retained earnings to cover expected credit 
losses associated with on- or off-balance sheet wholesale and retail 
exposures, including AACL associated with such exposures. Eligible 
credit reserves exclude allocated transfer risk reserves established 
pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on 
purchased credit deteriorated assets and available-

[[Page 4238]]

for-sale debt securities, and other specific reserves created against 
recognized losses.
* * * * *
    Standardized total risk-weighted assets means:
* * * * *
    (2) Any amount of a national bank's or Federal savings 
association's allowance for loan and lease losses or adjusted allowance 
for credit losses, as applicable, that is not included in tier 2 
capital and any amount of ``allocated transfer risk reserves.''
* * * * *


Sec.  3.10  [Amended]

0
5. Section 3.10 is amended in paragraph (c)(3)(ii)(A) by removing the 
words ``allowance for loan and lease losses'' and adding in their place 
the words ``allowance for loan and lease losses or adjusted allowance 
for credit losses, as applicable,''.


Sec.  3.20  [Amended]

0
6a. In Sec.  3.20, in paragraph (d)(3), remove first occurrence of the 
word ``ALLL'' and adding in its place the words ``ALLL or AACL, as 
applicable,'' and in the second occurrence ``ALLL or AACL, as 
applicable'' is added in its place.


Sec.  3.22  [Amended]

0
6b. In Sec.  3.22, in footnote 23 at the paragraph (c) subject heading, 
remove the word ``ALLL'' and add in its place the words ``ALLL or AACL, 
as applicable,''.


Sec.  3.63  [Amended]

0
7a. In Sec.  3.63, Table 5 is amended in its paragraphs (a)(5) and 
(e)(5) by removing the phrase ``allowance for loan and lease losses,'' 
and adding in its place wherever it appears the phrase ``allowance for 
loan and lease losses or adjusted allowance for credit losses, as 
applicable,'' and in its paragraph (g) by removing the word ``ALLL'' 
and adding in its place the words ``ALLL or AACL, as applicable''.


Sec.  3.124  [Amended]

0
7b. In Sec.  3.124, in paragraph (a) remove the word ``ALLL'' and add 
in its place the words ``ALLL or AACL, as applicable,'' and in 
paragraph (b)(2) remove the word ``ALLL'' and add in its place ``ALLL 
or AACL, as applicable''.


Sec.  3.173  [Amended]

0
8. Section 3.173 is amended:
0
a. In Table 2 by adding a paragraph (e);
0
b. In Table 3, by revising its paragraph (e), redesignating paragraph 
(f) as paragraph (g), and adding a new paragraph (f); and
0
c. In Table 5 by:
0
i. Removing the phrase ``allowance for loan and lease losses,'' and 
adding in its place the phrase ``allowance for loan and lease losses or 
adjusted allowance for credit losses, as applicable,'' in its paragraph 
(a)(5); and
0
ii. Revising its paragraph (g).
    The additions and revisions read as follows:


Sec.  3.173  Disclosures by certain advanced approaches national banks 
or Federal savings associations.

* * * * *

               Table 2 to Sec.   3.173--Capital Structure
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
                                           (e)  (1) Whether the national
                                                 bank or Federal savings
                                                 association has elected
                                                 to phase in recognition
                                                 of the transitional
                                                 amounts as defined in
                                                 Sec.   3.301.
                                     .........  (2) The national bank's
                                                 or Federal savings
                                                 association's common
                                                 equity tier 1 capital,
                                                 tier 1 capital, and
                                                 total capital without
                                                 including the
                                                 transitional amounts.
------------------------------------------------------------------------


                Table 3 to Sec.   3.173--Capital Adequacy
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
                                           (e)  (1) Common equity tier
                                                 1, tier 1 and total
                                                 risk-based capital
                                                 ratios reflecting the
                                                 transition provisions
                                                 described in Sec.
                                                 3.301:
                                     .........  (A) For the top
                                                 consolidated group; and
                                     .........  (2) For each depository
                                                 institution subsidiary.
                                           (f)  Common equity tier 1,
                                                 tier 1 and total risk-
                                                 based capital ratios
                                                 reflecting the full
                                                 adoption of CECL:
                                     .........  (1) For the top
                                                 consolidated group; and
                                     .........  (2) For each depository
                                                 institution subsidiary.
 
                              * * * * * * *
------------------------------------------------------------------------

* * * * *

        Table 5 to Sec.   3.173--Credit Risk: General Disclosures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
                                           (g)  Reconciliation of
                                                 changes in ALLL or
                                                 AACL, as applicable.\6\
 
                              * * * * * * *
------------------------------------------------------------------------
 * * * * * * *
\6\ The reconciliation should include the following: A description of
  the allowance; the opening balance of the allowance; charge-offs taken
  against the allowance during the period; amounts provided (or
  reversed) for estimated probable loan losses during the period; any
  other adjustments (for example, exchange rate differences, business
  combinations, acquisitions and disposals of subsidiaries), including
  transfers between allowances; and the closing balance of the
  allowance. Charge-offs and recoveries that have been recorded directly
  to the income statement should be disclosed separately.


[[Page 4239]]

* * * * *

Subpart G--Transition Provisions

0
9. Section 3.301 is added to subpart G to read as follows:


Sec.  3.301  Current Expected Credit Losses (CECL) Transition.

    (a) CECL transition provision criteria. A national bank or Federal 
savings association may elect to use a CECL transition provision 
pursuant to this section only if the national bank or Federal savings 
association records a reduction in retained earnings due to the 
adoption of CECL as of the beginning of the fiscal year in which the 
national bank or Federal savings association adopts CECL.
    (2) A national bank or Federal savings association that elects to 
use the CECL transition provision must use the CECL transition 
provision in the first Call Report filed by the national bank or 
Federal savings association after it adopts CECL.
    (3) A national bank or Federal savings association that does not 
elect to use the CECL transition provision as of the first Call Report 
filed as described in paragraph (a)(2) of this section may not elect to 
use the CECL transition provision in subsequent reporting periods.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Transition period means the three-year period beginning the 
first day of the fiscal year in which a national bank or Federal 
savings association adopts CECL.
    (2) CECL transitional amount means the decrease net of any DTAs, in 
the amount of a national bank's or Federal savings association's 
retained earnings as of the beginning of the fiscal year in which the 
national bank or Federal savings association adopts CECL from the 
amount of the national bank's or Federal savings association's retained 
earnings as of the closing of the fiscal year-end immediately prior to 
the national bank's or Federal savings association's adoption of CECL.
    (3) DTA transitional amount means the increase in the amount of a 
national bank's or Federal savings association's DTAs arising from 
temporary differences as of the beginning of the fiscal year in which 
the national bank or Federal savings association adopts CECL from the 
amount of the national bank's or Federal savings association's DTAs 
arising from temporary differences as of the closing of the fiscal 
year-end immediately prior to the national bank's or Federal savings 
association's adoption of CECL.
    (4) AACL transitional amount means the difference in the amount of 
a national bank's or Federal savings association's AACL as of the 
beginning of the fiscal year in which the national bank or Federal 
savings association adopts CECL and the amount of the national bank's 
or Federal savings association's ALLL as of the closing of the fiscal 
year-end immediately prior to the national bank's or Federal savings 
association's adoption of CECL.
    (5) Eligible credit reserves transitional amount means the increase 
in the amount of a national bank's or Federal savings association's 
eligible credit reserves as of the beginning of the fiscal year in 
which the national bank or Federal savings association adopts CECL from 
the amount of the national bank's or Federal savings association's 
eligible credit reserves as of the closing of the fiscal year-end 
immediately prior to the national bank's or Federal savings 
association's adoption of CECL.
    (c) Calculation of CECL transition provision. (1) For purposes of 
the election described in paragraph (a)(1) of this section, a national 
bank or Federal savings association must make the following adjustments 
in its calculation of regulatory capital ratios:
    (i) Increase retained earnings by seventy-five percent of its CECL 
transitional amount during the first year of the transition period, 
increase retained earnings by fifty percent of its CECL transitional 
amount during the second year of the transition period, and increase 
retained earnings by twenty-five percent of its CECL transitional 
amount during the third year of the transition period;
    (ii) Decrease amounts of DTAs arising from temporary differences by 
seventy-five percent of its DTA transitional amount during the first 
year of the transition period, decrease amounts of DTAs arising from 
temporary differences by fifty percent of its DTA transitional amount 
during the second year of the transition period, and decrease amounts 
of DTAs arising from temporary differences by twenty-five percent of 
its DTA transitional amount during the third year of the transition 
period;
    (iii) Decrease amounts of AACL by seventy-five percent of its AACL 
transitional amount during the first year of the transition period, 
decrease amounts of AACL by fifty percent of its AACL transitional 
amount during the second year of the transition period, and decrease 
amounts of AACL by twenty-five percent of its AACL transitional amount 
during the third year of the transition period;
    (iv) Increase average total consolidated assets as reported on the 
Call Report for purposes of the leverage ratio by seventy-five percent 
of its CECL transitional amount during the first year of the transition 
period, increase average total consolidated assets as reported on the 
Call Report for purposes of the leverage ratio by fifty percent of its 
CECL transitional amount during the second year of the transition 
period, and increase average total consolidated assets as reported on 
the Call Report for purposes of the leverage ratio by twenty-five 
percent of its CECL transitional amount during the third year of the 
transition period;
    (2) For purposes of the election described in paragraph (a)(1) of 
this section, an advanced approaches national bank or Federal savings 
association must make the following additional adjustments to its 
calculation of regulatory capital ratios:
    (i) Increase total leverage exposure for purposes of the 
supplementary leverage ratio by seventy-five percent of its CECL 
transitional amount during the first year of the transition period, 
increase total leverage exposure for purposes of the supplementary 
leverage ratio by fifty percent of its CECL transitional amount during 
the second year of the transition period, and increase total leverage 
exposure for purposes of the supplementary leverage ratio by twenty-
five percent of its CECL transitional amount during the third year of 
the transition period; and
    (ii) An advanced approaches national bank or Federal savings 
association that has completed the parallel run process and that has 
received notification from the OCC pursuant to Sec.  3.121(d) must 
decrease amounts of eligible credit reserves by seventy-five percent of 
its eligible credit reserves transitional amount during the first year 
of the transition period, decrease amounts of eligible credit reserves 
by fifty percent of its eligible credit reserves transitional amount 
during the second year of the transition provision, and decrease 
amounts of eligible credit reserves by twenty-five percent of its 
eligible credit reserves transitional amount during the third year of 
the transition provision.
    (3) An advanced approaches national bank or Federal savings 
association that has completed the parallel run process and that has 
received notification from the OCC pursuant to Sec.  3.121(d), and 
whose amount of expected credit loss exceeded its eligible credit 
reserves immediately prior to the adoption of CECL, and that this has 
an increase in common equity tier 1 capital as of the beginning of the 
fiscal year in which it adopts CECL after including the first

[[Page 4240]]

year portion of the CECL transitional amount must decrease its CECL 
transitional amount used in paragraph (c) of this section by the full 
amount of its DTA transitional amount.
    (4) Notwithstanding any other requirement in this section, for 
purposes of this paragraph, in the event of a business combination 
involving a national bank or Federal savings association where one or 
both of the national banks or Federal savings associations have elected 
the treatment described in this section:
    (i) If the acquirer national bank or Federal savings association 
(as determined under GAAP) elected the treatment described in this 
section, the acquirer national bank or Federal savings association must 
continue to use the transitional amounts (unaffected by the business 
combination) that it calculated as of the date that it adopted CECL 
through the end of its transition period.
    (ii) If the acquired insured depository institution (as determined 
under GAAP) elected the treatment described in this section, any 
transitional amount of the acquired insured depository institution does 
not transfer to the resulting national bank or Federal savings 
association.

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

0
10. The authority citation for part 5 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 24a, 93a, 215a-2, 215a-3, 481, 
1462a, 1463, 1464, 2901 et seq., 3907, and 5412(b)(2)(B).

0
 11. Section 5.3 is amended by revising paragraph (e)(2) to read as 
follows:


Sec.  5.3  Definitions.

* * * * *
    (e) * * *
    (2) The balance of a national bank's or Federal savings 
association's allowance for loan and lease losses or adjusted allowance 
for credit losses, as applicable, not included in the bank's Tier 2 
capital, for purposes of the calculation of risk-based capital 
described in paragraph (e)(1) of this section, as reported in the Call 
Report.
* * * * *

0
12. Section 5.37 is amended by revising paragraph (c)(3)(ii) to read as 
follows:


Sec.  5.37   Investment in national bank or Federal savings association 
premises.

* * * * *
    (c) * * *
    (3) * * *
    (ii) The balance of a national bank's or Federal savings 
association's allowance for loan and lease losses or adjusted allowance 
for credit losses, as applicable, not included in the bank's Tier 2 
capital, for purposes of the calculation of risk-based capital 
described in paragraph (c)(3)(i) of this section, as reported in the 
Call Report.
* * * * *

PART 23--LEASING

0
13. The authority citation for part 23 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 
93a.


0
14. Section 23.2 is amended by revising paragraph (b)(2) to read as 
follows:


Sec.  23.2   Definitions.

* * * * *
    (b) * * *
    (2) The balance of a bank's allowance for loan and lease losses or 
adjusted allowance for credit losses, as applicable, not included in 
the bank's Tier 2 capital, for purposes of the calculation of risk-
based capital described in paragraph (b)(1) of this section, as 
reported in the bank's Call Report.
* * * * *

PART 24--COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY 
DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS

0
 15. The authority citation for part 24 continues to read as follows:

    Authority:  12 U.S.C. 24(Eleventh), 93a, 481 and 1818.


0
16. Section 24.2 is amended by revising paragraph (b)(2) to read as 
follows:


Sec.  24.2  Definitions.

* * * * *
    (b) * * *
    (2) The balance of a bank's allowance for loan and lease losses or 
adjusted allowance for credit losses, as applicable, not included in 
the bank's Tier 2 capital, for purposes of the calculation of risk-
based capital described in paragraph (b)(1) of this section, as 
reported in the bank's Call Report.
* * * * *

PART 32--LENDING LIMITS

0
17. The authority citation for part 32 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463, 
1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h.


0
18. Section 32.2 is amended by revising paragraph (c)(2) to read as 
follows:


Sec.  32.2  Definitions

* * * * *
    (c) * * *
    (2) The balance of a national bank's or savings association's 
allowance for loan and lease losses or adjusted allowance for credit 
losses, as applicable, not included in the bank's Tier 2 capital, for 
purposes of the calculation of risk-based capital described in 
paragraph (c)(1) of this section, as reported in the bank's Call 
Report.
* * * * *

PART 46--ANNUAL STRESS TEST

0
 21. The authority citation for part 46 continues to read as follows:

    Authority:  12 U.S.C. 93a; 1463(a)(2); 5365(i)(2); and 
5412(b)(2)(B).


Sec.  46.8  [Amended]

0
22. Section 46.8 is amended by removing the phrase ``loan and lease'' 
and adding in its place ``credit'' in paragraphs (c)(3) and (d)(1).
* * * * *

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the preamble, chapter II of title 12 
of the Code of Federal Regulations is proposed to be amended as 
follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

0
23. The authority citation for part 208 continues to read as follows:

    Authority:  12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 
1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-3909, and 5371; 
15 U.S.C. 78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1, and 78w, 
1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 
4104a, 4104b, 4106 and 4128.


0
24. In Sec.  208.2, paragraph (d) is revised to read as follows:


Sec.  208.2   Definitions.

* * * * *
    (d) Capital stock and surplus means, unless otherwise provided in 
this part, or by statute:

[[Page 4241]]

    (1) Tier 1 and tier 2 capital included in a member bank's risk-
based capital (as defined in Sec.  217.2 of Regulation Q); and
    (2) The balance of a member bank's allowance for loan and lease 
losses or adjusted allowance for credit losses, as applicable, not 
included in its tier 2 capital for calculation of risk-based capital, 
based on the bank's most recent Report of Condition and Income filed 
under 12 U.S.C. 324.
* * * * *

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

0
25. The authority citation for part 211 continues to read as follows:

    Authority:  12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 
3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s, 
1681w, 6801 and 6805.

Subpart A--International Operations of U.S. Banking Organizations

0
26. In Sec.  211.2, revise paragraph (c)(1) to read as follows:


Sec.  211.2   Definitions.

* * * * *
    (c) * *
    (1) For organizations subject to Regulation Q:
    (i) Tier 1 and tier 2 capital included in an organization's risk-
based capital (under Regulation Q); and
    (ii) The balance of allowance for loan and lease losses or adjusted 
allowance for credit losses, as applicable, not included in an 
organization's tier 2 capital for calculation of risk-based capital, 
based on the organization's most recent consolidated Report of 
Condition and Income.
* * * * *

Subpart D--International Lending Supervision

0
27. In Sec.  211.43, revise paragraph (c)(4) to read as follows:


Sec.  211.43   Allocated transfer risk reserve.

* * * * *
    (c) * * *
    (4) Alternative accounting treatment. A banking institution is not 
required to establish an ATRR if it writes down in the period in which 
the ATRR is required, or has written down in prior periods, the value 
of the specified international assets in the requisite amount for each 
such asset. For purposes of this paragraph, international assets may be 
written down by a charge to the Allowance for Loan and Lease Losses or 
the allowance for credit losses, as applicable, to the extent permitted 
under U.S. generally accepted accounting principles, or a reduction in 
the principal amount of the asset by application of interest payments 
or other collections on the asset. However, the Allowance for Loan and 
Lease Losses or allowance for credit losses, as applicable, must be 
replenished in such amount necessary to restore it to a level which 
adequately provides for the estimated losses inherent in the banking 
institution's loan portfolio.
* * * * *

PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL 
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)

0
28. The authority citation for part 215 continues to read as follows:

    Authority:  12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468, 
1817(k), 5412; and Pub. L. 102-242, 105 Stat. 2236 (1991).


0
29. In Sec.  215.2, revise paragraph (i) to read as follows:


Sec.  215.2   Definitions.

* * * * *
    (i) Lending limit. The lending limit for a member bank is an amount 
equal to the limit of loans to a single borrower established by section 
5200 of the Revised Statutes,\52\ 12 U.S.C. 84. This amount is 15 
percent of the bank's unimpaired capital and unimpaired surplus in the 
case of loans that are not fully secured, and an additional 10 percent 
of the bank's unimpaired capital and unimpaired surplus in the case of 
loans that are fully secured by readily marketable collateral having a 
market value, as determined by reliable and continuously available 
price quotations, at least equal to the amount of the loan. The lending 
limit also includes any higher amounts that are permitted by section 
5200 of the Revised Statutes for the types of obligations listed 
therein as exceptions to the limit. A member bank's unimpaired capital 
and unimpaired surplus equals:
---------------------------------------------------------------------------

    \52\ Where State law establishes a lending limit for a State 
member bank that is lower than the amount permitted in section 5200 
of the Revised Statutes, the lending limit established by applicable 
State laws shall be the lending limit for the State member bank.
---------------------------------------------------------------------------

    (1) The bank's tier 1 and tier 2 capital included in the bank's 
risk-based capital under the capital rule of the appropriate Federal 
banking agency, based on the bank's most recent consolidated report of 
condition filed under 12 U.S.C. 1817(a)(3); and
    (2) The balance of the bank's allowance for loan and lease losses 
or adjusted allowance for credit losses, as applicable, not included in 
the bank's tier 2 capital for purposes of the calculation of risk-based 
capital under the capital rule of the appropriate Federal banking 
agency, based on the bank's most recent consolidated reports of 
condition filed under 12 U.S.C. 1817(a)(3).
* * * * *

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)

0
30. The authority citation for part 217 continues to read as follows:

    Authority:  12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371.


0
31. In Sec.  217.2,
0
a. Add in alphabetical order a definition for ``adjusted allowances for 
credit losses (AACL)'';
0
b. Revise the definition of ``carrying value'';
0
c. Add in alphabetical order a definition for ``current expected credit 
losses (CECL)''; and
0
d. Revise the definitions of ``eligible credit reserves'' and paragraph 
(2) or the definition of ``standardized total risk-weighted assets''.
    The additions and revisions read as follows:


Sec.  217.2   Definitions.

* * * * *
    Adjusted allowances for credit losses (AACL) means, with respect to 
a Board-regulated institution that has adopted CECL, valuation 
allowances that have been established through a charge against earnings 
or retained earnings for expected credit losses on financial assets 
measured at amortized cost and a lessor's net investment in leases that 
have been established to reduce the amortized cost basis of the assets 
to amounts expected to be collected as determined in accordance with 
GAAP. For purposes of this part, adjusted allowances for credit losses 
include allowances for expected credit losses on off-balance sheet 
credit exposures not accounted for as insurance as determined in 
accordance with GAAP. Adjusted allowances for credit losses exclude 
``allocated transfer risk reserves'' and allowances created that 
reflect credit losses on purchased credit deteriorated assets and 
available-for-sale debt securities.
* * * * *
    Carrying value means, with respect to an asset, the value of the 
asset on the

[[Page 4242]]

balance sheet of a Board-regulated institution as determined in 
accordance with GAAP. For all assets other than available-for-sale debt 
securities or purchased credit deteriorated assets, the carrying value 
is not reduced by any associated credit loss allowance that is 
determined in accordance with GAAP.
* * * * *
    Current Expected Credit Losses (CECL) means the current expected 
credit losses methodology under GAAP.
* * * * *
    Eligible credit reserves means:
    (1) For a Board-regulated institution that has not adopted CECL, 
all general allowances that have been established through a charge 
against earnings to cover estimated credit losses associated with on- 
or off-balance sheet wholesale and retail exposures, including the ALLL 
associated with such exposures, but excluding allocated transfer risk 
reserves established pursuant to 12 U.S.C. 3904 and other specific 
reserves created against recognized losses; and
    (2) For a Board-regulated institution that has adopted CECL, all 
general allowances that have been established through a charge against 
earnings or retained earnings to cover expected credit losses 
associated with on- or off-balance sheet wholesale and retail 
exposures, including AACL associated with such exposures. Eligible 
credit reserves exclude allocated transfer risk reserves established 
pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on 
purchased credit deteriorated assets and available-for-sale debt 
securities, and other specific reserves created against recognized 
losses.
* * * * *
    Standardized total risk-weighted assets means:
* * * * *
    (2) Any amount of the Board-regulated institution's allowance for 
loan and lease losses or adjusted allowance for credit losses, as 
applicable, that is not included in tier 2 capital and any amount of 
``allocated transfer risk reserves.''
* * * * *


Sec.  217.10  [Amended]

0
32. In Sec.  217.10, in paragraph (c)(3)(ii)(A), remove the words 
``allowance for loan and lease losses'' and add, in their place, the 
words ``allowance for loan and lease losses or adjusted allowance for 
credit losses, as applicable,''.


Sec.  217.20  [Amended]

0
33a. In Sec.  217.20, in paragraph (d)(3), remove the first occurrence 
of the word ``ALLL'' and add in its place the words ``ALLL or AACL, as 
applicable,'' and in the second occurrence ``ALLL or AACL, as 
applicable'' is added in its place.


Sec.  217.22  [Amended]

0
33b. In Sec.  217.22, in footnote 23 at the paragraph (c) subject 
heading, remove the word ``ALLL'' and add in its place the words ``ALLL 
or AACL, as applicable,''.


Sec.  217.63  [Amended]

0
34a. In Table 5 to Sec.  217.63, remove the words ``allowance for loan 
and lease losses'' and add, in their place, the words ``allowance for 
loan and lease losses or adjusted allowance for credit losses, as 
applicable,'' and remove the word ``ALLL'' and add, in its place, the 
words ``ALLL or AACL, as applicable''.


Sec.  217.124  [Amended]

0
34b. In Sec.  217.124, in paragraph (a) remove the word ``ALLL'' and 
add in its place the words ``ALLL or AACL, as applicable,'' and in 
paragraph (b)(2) remove the word ``ALLL'' and add in its place ``ALLL 
or AACL, as applicable''.

0
35. Amend Sec.  217.173 as follows:
0
a. In Table 2, add paragraph (e);
0
b. In Table 3, revise paragraph (e), redesignate paragraph (f) as 
paragraph (g), and add a new paragraph (f); and
0
c. In Table 5, revise paragraphs (a), (e), and (g).
    The additions and revisions read as follows.


Sec.  217.173  Disclosures by certain advanced approaches Board-
regulated institutions.

* * * * *

              Table 2 to Sec.   217.173--Capital Structure
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
                                           (e)  (1) Whether the Board-
                                                 regulated institution
                                                 has elected to phase in
                                                 recognition of the
                                                 transitional amounts as
                                                 defined in Sec.
                                                 217.300(f).
                                     .........  (2) The Board-regulated
                                                 institution's common
                                                 equity tier 1 capital,
                                                 tier 1 capital, and
                                                 total capital without
                                                 including the
                                                 transitional amounts as
                                                 defined in Sec.
                                                 217.300(f).
------------------------------------------------------------------------


               Table 3 to Sec.   217.173--Capital Adequacy
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
                                           (e)  (1) Common equity tier
                                                 1, tier 1 and total
                                                 risk-based capital
                                                 ratios reflecting the
                                                 transition provisions
                                                 described in Sec.
                                                 217.300(f):
                                     .........  (A) For the top
                                                 consolidated group; and
                                     .........  (2) For each depository
                                                 institution subsidiary.
                                           (f)  Common equity tier 1,
                                                 tier 1 and total risk-
                                                 based capital ratios
                                                 reflecting the full
                                                 adoption of CECL:
                                     .........  (1) For the top
                                                 consolidated group; and
                                     .........  (2) For each depository
                                                 institution subsidiary.
 
                              * * * * * * *
------------------------------------------------------------------------

* * * * *

     Table 5\1\ to Sec.   217.173--Credit Risk: General Disclosures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures............        (a)  The general qualitative
                                                 disclosure requirement
                                                 with respect to credit
                                                 risk (excluding
                                                 counterparty credit
                                                 risk disclosed in
                                                 accordance with Table 7
                                                 to Sec.   217.173),
                                                 including:
                                     .........  (1) Policy for
                                                 determining past due or
                                                 delinquency status;

[[Page 4243]]

 
                                     .........  (2) Policy for placing
                                                 loans on nonaccrual;
                                     .........  (3) Policy for returning
                                                 loans to accrual
                                                 status;
                                     .........  (4) Definition of and
                                                 policy for identifying
                                                 impaired loans (for
                                                 financial accounting
                                                 purposes).
                                     .........  (5) Description of the
                                                 methodology that the
                                                 entity uses to estimate
                                                 its allowance for loan
                                                 and lease losses or
                                                 adjusted allowance for
                                                 credit losses, as
                                                 applicable, including
                                                 statistical methods
                                                 used where applicable;
                                     .........  (6) Policy for charging-
                                                 off uncollectible
                                                 amounts; and
                                     .........  (7) Discussion of the
                                                 Board-regulated
                                                 institution's credit
                                                 risk management policy.
 
                              * * * * * * *
                                           (e)  By major industry or
                                                 counterparty type:
                                     .........  (1) Amount of impaired
                                                 loans for which there
                                                 was a related allowance
                                                 under GAAP;
                                     .........  (2) Amount of impaired
                                                 loans for which there
                                                 was no related
                                                 allowance under GAAP;
                                     .........  (3) Amount of loans past
                                                 due 90 days and on
                                                 nonaccrual;
                                     .........  (4) Amount of loans past
                                                 due 90 days and still
                                                 accruing; \4\
                                     .........  (5) The balance in the
                                                 allowance for loan and
                                                 lease losses or
                                                 adjusted allowance for
                                                 credit losses, as
                                                 applicable, at the end
                                                 of each period,
                                                 disaggregated on the
                                                 basis of the entity's
                                                 impairment method. To
                                                 disaggregate the
                                                 information required on
                                                 the basis of impairment
                                                 methodology, an entity
                                                 shall separately
                                                 disclose the amounts
                                                 based on the
                                                 requirements in GAAP;
                                                 and
                                     .........  (6) Charge-offs during
                                                 the period.
 
                              * * * * * * *
                                           (g)  Reconciliation of
                                                 changes in ALLL or
                                                 AACL, as applicable.\6\
 
                              * * * * * * *
------------------------------------------------------------------------
\1\ Table 5 to Sec.   217.173 does not cover equity exposures, which
  should be reported in Table 9.
\2\ See, for example, ASC Topic 815-10 and 210-20, as they may be
  amended from time to time.
\3\ Geographical areas may comprise individual countries, groups of
  countries, or regions within countries. A Board-regulated institution
  might choose to define the geographical areas based on the way the
  company's portfolio is geographically managed. The criteria used to
  allocate the loans to geographical areas must be specified.
\4\ A Board-regulated institution is encouraged also to provide an
  analysis of the aging of past-due loans.
\5\ The portion of the general allowance that is not allocated to a
  geographical area should be disclosed separately.
\6\ The reconciliation should include the following: A description of
  the allowance; the opening balance of the allowance; charge-offs taken
  against the allowance during the period; amounts provided (or
  reversed) for estimated probable loan losses during the period; any
  other adjustments (for example, exchange rate differences, business
  combinations, acquisitions and disposals of subsidiaries), including
  transfers between allowances; and the closing balance of the
  allowance. Charge-offs and recoveries that have been recorded directly
  to the income statement should be disclosed separately.

* * * * *

Subpart G--Transition Provisions

0
36. Add Sec.  217.301 to subpart G to read as follows:


Sec.  217.301  Current expected credit losses (CECL) transition.

    (a) CECL transition provision. (1) A Board-regulated institution 
may elect to use a CECL transition provision pursuant to this section 
only if the Board-regulated institution records a reduction in retained 
earnings due to the adoption of CECL as of the beginning of the fiscal 
year in which the Board-regulated institution adopts CECL.
    (2) A Board-regulated institution that elects to use the CECL 
transition provision must use the CECL transition provision in the 
first Call Report or FR Y-9C that includes CECL filed by the Board-
regulated institution after it adopts CECL.
    (3) A Board-regulated institution that does not elect to use the 
CECL transition provision as of the first Call Report or FR Y-9C that 
includes CECL filed as described in paragraph (a)(2) of this section 
may not elect to use the CECL transition provision in subsequent 
reporting periods.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Transition period means the three-year period beginning the 
first day of the fiscal year in which a Board-regulated institution 
adopts CECL.
    (2) CECL transitional amount means the decrease net of any DTAs in 
the amount of a Board-regulated institution's retained earnings as of 
the beginning of the fiscal year in which the Board-regulated 
institution adopts CECL from the amount of the Board-regulated 
institution's retained earnings as of the closing of the fiscal year-
end immediately prior to the Board-regulated institution's adoption of 
CECL.
    (3) DTA transitional amount means the increase in the amount of a 
Board-regulated institution's DTAs arising from temporary differences 
as of the beginning of the fiscal year in which the Board-regulated 
institution adopts CECL from the amount of the Board-regulated 
institution's DTAs arising from temporary differences as of the closing 
of the fiscal year-end immediately prior to the Board-regulated 
institution's adoption of CECL.
    (4) AACL transitional amount means the difference in the amount of 
a Board-regulated institution's AACL as of the beginning of the fiscal 
year in which the Board-regulated institution adopts CECL and the 
amount of the Board-regulated institution's ALLL as of the closing of 
the fiscal year-end immediately prior to the Board-regulated 
institution's adoption of CECL.
    (5) Eligible credit reserves transitional amount means the increase 
in the amount of a Board-regulated institution's eligible credit 
reserves as of the beginning of the fiscal year in which the Board-
regulated institution adopts CECL from the amount of the Board-
regulated institution's eligible credit reserves as of the closing of 
the fiscal year-end immediately prior to the Board-regulated 
institution's adoption of CECL.
    (c) Calculation of CECL transition provision. (1) For purposes of 
the election described in paragraph (a)(1) of this section, a Board-
regulated institution must make the following adjustments in its 
calculation of regulatory capital ratios:
    (i) Increase retained earnings by seventy-five percent of its CECL 
transitional amount during the first year

[[Page 4244]]

of the transition period, increase retained earnings by fifty percent 
of its CECL transitional amount during the second year of the 
transition period, and increase retained earnings by twenty-five 
percent of its CECL transitional amount during the third year of the 
transition period;
    (ii) Decrease amounts of DTAs arising from temporary differences by 
seventy-five percent of its DTA transitional amount during the first 
year of the transition period, decrease amounts of DTAs arising from 
temporary differences by fifty percent of its DTA transitional amount 
during the second year of the transition period, and decrease amounts 
of DTAs arising from temporary differences by twenty-five percent of 
its DTA transitional amount during the third year of the transition 
period;
    (iii) Decrease amounts of AACL by seventy-five percent of its AACL 
transitional amount during the first year of the transition period, 
decrease amounts of AACL by fifty percent of its AACL transitional 
amount during the second year of the transition period, and decrease 
amounts of AACL by twenty-five percent of its AACL transitional amount 
during the third year of the transition period;
    (iv) Increase average total consolidated assets as reported on the 
Call Report or FR Y-9C for purposes of the leverage ratio by seventy-
five percent of its CECL transitional amount during the first year of 
the transition period, increase average total consolidated assets as 
reported on the Call Report or FR Y-9C for purposes of the leverage 
ratio by fifty percent of its CECL transitional amount during the 
second year of the transition period, and increase average total 
consolidated assets as reported on the Call Report or FR Y-9C for 
purposes of the leverage ratio by twenty-five percent of its CECL 
transitional amount during the third year of the transition period;
    (2) For purposes of the election described in paragraph (a)(1) of 
this section, an advanced approaches Board-regulated institution must 
make the following additional adjustments to its calculation of 
regulatory capital ratios:
    (i) Increase total leverage exposure for purposes of the 
supplementary leverage ratio by seventy-five percent of its CECL 
transitional amount during the first year of the transition period, 
increase total leverage exposure for purposes of the supplementary 
leverage ratio by fifty percent of its CECL transitional amount during 
the second year of the transition period, and increase total leverage 
exposure for purposes of the supplementary leverage ratio by twenty-
five percent of its CECL transitional amount during the third year of 
the transition period; and
    (ii) An advanced approaches Board-regulated institution that has 
completed the parallel run process and has received notification from 
the Board pursuant to Sec.  217.121(d) must decrease amounts of 
eligible credit reserves by seventy-five percent of its eligible credit 
reserves transitional amount during the first year of the transition 
period, decrease amounts of eligible credit reserves by fifty percent 
of its eligible credit reserves transitional amount during the second 
year of the transition provision, and decrease amounts of eligible 
credit reserves by twenty-five percent of its eligible credit reserves 
transitional amount during the third year of the transition period.
    (3) An advanced approaches Board-regulated institution that has 
completed the parallel run process and has received notification from 
the Board pursuant to Sec.  217.121(d), whose amount of expected credit 
loss exceeded its eligible credit reserves immediately prior to the 
adoption of CECL, and that has an increase in common equity tier 1 
capital as of the beginning of the fiscal year in which it adopts CECL 
after including the first year portion of the CECL transitional amount 
must decrease its CECL transitional amount used in paragraph (c) of 
this section by the full amount of its DTA transitional amount.
    (4) Notwithstanding any other requirement in this section, for 
purposes of this paragraph, in the event of a business combination 
involving a Board-regulated institution where one or both Board-
regulated institutions have elected the treatment described in this 
section:
    (i) If the acquirer Board-regulated institution (as determined 
under GAAP) elected the treatment described in this section, the 
acquirer Board-regulated institution must continue to use the 
transitional amounts (unaffected by the business combination) that it 
calculated as of the date that it adopted CECL through the end of its 
transition period.
    (ii) If the acquired company (as determined under GAAP) elected the 
treatment described in this section, any transitional amount of the 
acquired company does not transfer to the resulting Board-regulated 
institution.

PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES 
(REGULATION W)

0
37. The authority citation for part 223 continues to read as follows:

    Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-
1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd Frank 
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412).

Subpart A--Introduction and Definitions

0
38. In Sec.  223.3, revise paragraph (d) to read as follows:


Sec.  223.3   What are the meanings of the other terms used in sections 
23A and 23B and this part?

* * * * *
    (d) Capital stock and surplus means the sum of:
    (1) A member bank's tier 1 and tier 2 capital under the capital 
rule of the appropriate Federal banking agency, based on the member 
bank's most recent consolidated Report of Condition and Income filed 
under 12 U.S.C. 1817(a)(3);
    (2) The balance of a member bank's allowance for loan and lease 
losses or adjusted allowance for credit losses, as applicable, not 
included in its tier 2 capital under the capital rule of the 
appropriate Federal banking agency, based on the member bank's most 
recent consolidated Report of Condition and Income filed under 12 
U.S.C. 1817(a)(3); and
    (3) The amount of any investment by a member bank in a financial 
subsidiary that counts as a covered transaction and is required to be 
deducted from the member bank's capital for regulatory capital 
purposes.
* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
39. The authority citation for part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1831i, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 
3906, 3907 and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.


0
40. In Sec.  225.127,
0
a. Remove ``Sec.  225.25(b)(6)'' wherever it appears and add in its 
place ``Sec.  225.28(b)(12)'' and remove ``Sec.  225.23'' in paragraphs 
(a) and (d) and add in its place ``Sec.  225.23 or Sec.  225.24''; and
0
b. Revise paragraph (h).
    The revision reads as follows:


Sec.  225.127   Investments in corporations or projects designed 
primarily to promote community welfare.

* * * * *
    (h) For purposes of paragraph (f) of this section, five percent of 
the total consolidated capital stock and surplus of a bank holding 
company includes its total investment in projects described in

[[Page 4245]]

paragraph (f) of this section, when aggregated with similar types of 
investments made by depository institutions controlled by the bank 
holding company. The term total consolidated capital stock and surplus 
of the bank holding company means total equity capital and the 
allowance for loan and lease losses or adjusted allowance for credit 
losses, as applicable, based on the bank holding company's most recent 
FR Y-9C (Consolidated Financial Statements for Holding Companies) or FR 
Y-9SP (Parent Company Only Financial Statements for Small Holding 
Companies).

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
41. The authority citation for part 252 continues to read as follows:

    Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828, 
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367, 
5368, 5371.

Subpart B--Company-Run Stress Test Requirements for Certain U.S. 
Banking Organizations With Total Consolidated Assets Over $10 
Billion and Less Than $50 Billion

0
42. In Sec.  252.12, revise paragraph (m) to read as follows:


Sec.  252.12  Definitions.

* * * * *
    (m) Provision for credit losses means:
    (1) Until December 31, 2019:
    (i) With respect to a bank holding company, savings and loan 
holding company, or state member bank that has not adopted the current 
expected credit losses methodology under U.S. generally accepted 
accounting principles (GAAP), the provision for loan and lease losses 
as reported on the FR Y-9C (and as would be reported on the FR Y-9C or 
Call Report, as appropriate, in the current stress test cycle); and,
    (ii) With respect to a bank holding company, savings and loan 
holding company, or state member bank that has adopted the current 
expected credit losses methodology under GAAP, the provision for loan 
and lease losses, as would be calculated and reported on the FR Y-9C or 
Call Report, as appropriate, by a bank holding company, savings and 
loan holding company, or state member bank that has not adopted the 
current expected credit losses methodology under GAAP; and
    (2) Beginning January 1, 2020:
    (i) With respect to a covered company that has adopted the current 
expected credit losses methodology under GAAP, the provision for credit 
losses, as would be reported by the bank holding company, savings and 
loan holding company, or state member bank on the FR Y-9C or Call 
Report, as appropriate, in the current stress test cycle; and
    (ii) With respect to a bank holding company, savings and loan 
holding company, or state member bank that has not adopted the current 
expected credit losses methodology under GAAP, the provision for loan 
and lease losses as would be reported by the bank holding company, 
savings and loan holding company, or state member bank on the FR Y-9C 
or Call Report, as appropriate, in the current stress test cycle.
* * * * *

0
43. In Sec.  252.15, revise paragraph (a)(1) and (2) to read as 
follows:


Sec.  252.15  Methodologies and practices.

    (a) * * *
    (1) Losses, pre-provision net revenue, provision for credit losses, 
and net income; and
    (2) The potential impact on the regulatory capital levels and 
ratios applicable to the covered bank, and any other capital ratios 
specified by the Board, incorporating the effects of any capital action 
over the planning horizon and maintenance of an allowance for loan 
losses or adjusted allowance for credit losses, as appropriate, for 
credit exposures throughout the planning horizon.
* * * * *

0
44. In Sec.  252.16, revise paragraph (b)(3) to read as follows:


Sec.  252.16  Reports of stress test results.

* * * * *
    (b) * * *
    (3) For each quarter of the planning horizon, estimates of 
aggregate losses, pre-provision net revenue, provision for credit 
losses, net income, and regulatory capital ratios;
* * * * *

0
45. In Sec.  252.17, revise paragraphs (b)(1)(iii)(C), (b)(3)(iii)(C), 
and (c)(1) to read as follows:


Sec.  252.17  Disclosure of stress test results.

* * * * *
    (b) * * *
    (1) * * *
    (iii) * * *
    (C) Provision for credit losses;
* * * * *
    (3) * * *
    (iii) * * *
    (C) Provision for credit losses;
* * * * *
    (c) * * *
    (1) The disclosure of aggregate losses, pre-provision net revenue, 
provision for credit losses, and net income that is required under 
paragraph (b) of this section must be on a cumulative basis over the 
planning horizon.
* * * * *

Subpart E--Supervisory Stress Test Requirements for U.S. Bank 
Holding Companies with $50 Billion or More in Total Consolidated 
Assets and Nonbank Financial Companies Supervised by the Board

0
46. In Sec.  252.42, revise paragraph (l) to read as follows:


Sec.  252.42  Definitions.

* * * * *
    (l) Provision for credit losses means:
    (1) Until December 31, 2019:
    (i) With respect to a covered company that has not adopted the 
current expected credit losses methodology under U.S. generally 
accepted accounting principles (GAAP), the provision for loan and lease 
losses as reported on the FR Y-9C (and as would be reported on the FR 
Y-9C in the current stress test cycle); and
    (ii) With respect to a covered company that has adopted the current 
expected credit losses methodology under GAAP, the provision for loan 
and lease losses, as would be calculated and reported on the FR Y-9C by 
a covered company that has not adopted the current expected credit 
losses methodology under GAAP; and
    (2) Beginning January 1, 2020:
    (i) With respect to a covered company that has adopted the current 
expected credit losses methodology under GAAP, the provision for credit 
losses, as would be reported by the covered company on the FR Y-9C in 
the current stress test cycle; and,
    (ii) With respect to a covered company that has not adopted the 
current expected credit losses methodology under GAAP, the provision 
for loan and lease losses as would be reported by the covered company 
on the FR Y-9C in the current stress test cycle.
* * * * *

0
47. In Sec.  252.45, revise paragraph (b)(2) to read as follows:


Sec.  252.45  Data and information required to be submitted in support 
of the Board's analyses.

* * * * *
    (b) * * *
    (2) Project a company's pre-provision net revenue, losses, 
provision for credit losses, and net income; and pro forma capital 
levels, regulatory capital ratios, and any other capital ratio 
specified by

[[Page 4246]]

the Board under the scenarios described in Sec.  252.44(b).
* * * * *

Subpart F--Company-Run Stress Test Requirements for U.S. Bank 
Holding Companies with $50 Billion or More in Total Consolidated 
Assets and Nonbank Financial Companies Supervised by the Board

0
48. In Sec.  252.52, revise paragraph (m) to read as follows:


Sec.  252.52  Definitions.

* * * * *
    (m) Provision for credit losses means:
    (1) Until December 31, 2019:
    (i) With respect to a covered company that has not adopted the 
current expected credit losses methodology under GAAP, the provision 
for loan and lease losses as reported on the FR Y-9C (and as would be 
reported on the FR Y-9C in the current stress test cycle); and
    (ii) With respect to a covered company that has adopted the current 
expected credit losses methodology under GAAP, the provision for loan 
and lease losses, as would be calculated and reported on the FR Y-9C by 
a covered company that has not adopted the current expected credit 
losses methodology under GAAP; and
    (2) Beginning January 1, 2020:
    (i) With respect to a covered company that has adopted the current 
expected credit losses methodology under GAAP, the provision for credit 
losses, as would be reported by the covered company on the FR Y-9C in 
the current stress test cycle; and
    (ii) With respect to a covered company that has not adopted the 
current expected credit losses methodology under GAAP, the provision 
for loan and lease losses as would be reported by the covered company 
on the FR Y-9C in the current stress test cycle.
* * * * *

0
49. In Sec.  252.56, revise paragraph (a)(1) and (2) to read as 
follows:


Sec.  252.56  Methodologies and practices.

    (a) * * *
    (1) Losses, pre-provision net revenue, provision for credit losses, 
and net income; and
    (2) The potential impact on the regulatory capital levels and 
ratios applicable to the covered bank, and any other capital ratios 
specified by the Board, incorporating the effects of any capital action 
over the planning horizon and maintenance of an allowance for loan 
losses or adjusted allowance for credit losses, as appropriate, for 
credit exposures throughout the planning horizon.
* * * * *

0
50. In Sec.  252.58, revise paragraphs (b)(2), (b)(3)(ii), and 
(c)(1)(ii) to read as follows:


Sec.  252.58  Disclosure of stress test results.

* * * * *
    (b) * * *
    (2) A general description of the methodologies used in the stress 
test, including those employed to estimate losses, revenues, provision 
for credit losses, and changes in capital positions over the planning 
horizon.
    (3) * * *
    (ii) Provision for credit losses, realized losses or gains on 
available-for-sale and held-to-maturity securities, trading and 
counterparty losses or gains;
* * * * *
    (c) * * *
    (1) * * *
    (i) * * *
    (ii) Provision for credit losses, realized losses/gains on 
available-for-sale and held-to-maturity securities, trading and 
counterparty losses, and other losses or gain;
* * * * *

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

    For the reasons stated in the preamble, the Federal Deposit 
Insurance Corporation proposes to amend chapter III of Title 12, Code 
of Federal Regulations as follows:

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

0
51. The authority citation for part 324 continues to read as follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, 
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).


0
52. Section 324.2 is amended by:
0
a. Adding in alphabetical order a definition for ``adjusted allowances 
for credit losses (AACL)'';
0
b. Revising the definition of ``carrying value'';
0
c. Adding in alphabetical order a definition for ``Current Expected 
Credit Losses (CECL)''; and
0
d. Revising the definitions of ``eligible credit reserves'' and 
``identified losses'' and paragraph (2) of the definition of 
``standardized total risk-weighted assets''.
    The additions and revisions read as follows:


Sec.  324.2  Definitions.

* * * * *
    Adjusted allowances for credit losses (AACL) means, with respect to 
an FDIC-supervised institution that has adopted CECL, valuation 
allowances that have been established through a charge against earnings 
or retained earnings for expected credit losses on financial assets 
measured at amortized cost and a lessor's net investment in leases that 
have been established to reduce the amortized cost basis of the assets 
to amounts expected to be collected as determined in accordance with 
GAAP. For purposes of this part, adjusted allowances for credit losses 
include allowances for expected credit losses on off-balance sheet 
credit exposures not accounted for as insurance as determined in 
accordance with GAAP. Adjusted allowances for credit losses exclude 
``allocated transfer risk reserves'' and allowances created that 
reflect credit losses on purchased credit deteriorated assets and 
available-for-sale debt securities.
* * * * *
    Carrying value means, with respect to an asset, the value of the 
asset on the balance sheet of the FDIC-supervised institution as 
determined in accordance with GAAP. For all assets other than 
available-for-sale debt securities or purchased credit deteriorated 
assets, the carrying value is not reduced by any associated credit loss 
allowance that is determined in accordance with GAAP.
* * * * *
    Current Expected Credit Losses (CECL) means the current expected 
credit losses methodology under GAAP.
* * * * *
    Eligible credit reserves means:
    (1) For an FDIC-supervised institution that has not adopted CECL, 
all general allowances that have been established through a charge 
against earnings to cover estimated credit losses associated with on- 
or off-balance sheet wholesale and retail exposures, including the ALLL 
associated with such exposures, but excluding allocated transfer risk 
reserves established pursuant to 12 U.S.C. 3904 and other specific 
reserves created against recognized losses; and
    (2) For an FDIC-supervised institution that has adopted CECL, all 
general allowances that have been established through a charge against 
earnings or

[[Page 4247]]

retained earnings to cover expected credit losses associated with on- 
or off-balance sheet wholesale and retail exposures, including AACL 
associated with such exposures. Eligible credit reserves exclude 
allocated transfer risk reserves established pursuant to 12 U.S.C. 
3904, allowances that reflect credit losses on purchased credit 
deteriorated assets and available-for-sale debt securities, and other 
specific reserves created against recognized losses.
* * * * *
    Identified losses means:
    (1) When measured as of the date of examination of an FDIC-
supervised institution, those items that have been determined by an 
evaluation made by a state or Federal examiner as of that date to be 
chargeable against income, capital and/or general valuation allowances 
such as the allowances for loan and lease losses (examples of 
identified losses would be assets classified loss, off-balance sheet 
items classified loss, any provision expenses that are necessary for 
the FDIC-supervised institution to record in order to replenish its 
general valuation allowances to an adequate level, liabilities not 
shown on the FDIC-supervised institution's books, estimated losses in 
contingent liabilities, and differences in accounts which represent 
shortages) or the adjusted allowances for credit losses; and
    (2) When measured as of any other date, those items:
    (i) That have been determined--
    (A) By an evaluation made by a state or Federal examiner at the 
most recent examination of an FDIC-supervised institution to be 
chargeable against income, capital and/or general valuation allowances; 
or
    (B) By evaluations made by the FDIC-supervised institution since 
its most recent examination to be chargeable against income, capital 
and/or general valuation allowances; and
    (ii) For which the appropriate accounting entries to recognize the 
loss have not yet been made on the FDIC-supervised institution's books 
nor has the item been collected or otherwise settled.
* * * * *
    Standardized total risk-weighted assets * * *
    (2) Any amount of the FDIC-supervised institution's allowance for 
loan and lease losses or adjusted allowance for credit losses, as 
applicable, that is not included in tier 2 capital and any amount of 
``allocated transfer risk reserves.''
* * * * *


Sec.  324.10  [Amended]

0
53. Section 324.10(c)(3)(ii)(A) is amended by removing the words 
``allowance for loan and lease losses'' and adding in their place the 
words ``allowance for loan and lease losses or adjusted allowance for 
credit losses, as applicable,''.


Sec.  324.20  [Amended]

0
54a. In Sec.  324.20, in paragraph (d)(3), remove the first occurrence 
of the word ``ALLL'' and add in its place the words ``ALLL or AACL, as 
applicable,'' and in the second occurrence ``ALLL or AACL, as 
applicable'' is added in its place.


Sec.  324.22  [Amended]

0
54b. In Sec.  324.22, in footnote 23 at the paragraph (c) subject 
heading, remove the word ``ALLL'' and add in its place the words ``ALLL 
or AACL, as applicable,''.


Sec.  324.63  [Amended]

0
55a. In Table 5 to Sec.  324.63, in paragraph (a)(5), remove the phrase 
``allowance for loan and lease losses,'' and in paragraph (e)(5) remove 
the phrase ``allowance for loan and lease losses'' and add in their 
place ``allowance for loan and lease losses or adjusted allowance for 
credit losses, as applicable,'' and in paragraph (g) by removing 
``ALLL'' and adding in its place ``ALLL or AACL, as applicable''.


Sec.  324.124  [Amended]

0
55b. In Sec.  324.124, in paragraph (a), remove the word ``ALLL'' and 
add in its place the words ``ALLL or AACL, as applicable,'' and in 
paragraph (b) remove the word ``ALLL'' and add in its place ``ALLL or 
AACL, as applicable''.

0
56. Section 324.173 is amended:
0
a. In Table 2, by adding paragraph (e);
0
b. In Table 3, by revising paragraph (e), redesignating paragraph (f) 
as paragraph (g), and adding a new paragraph (f); and
0
c. In Table 5 to Sec.  324.173, in paragraph (a)(5), remove the phrase 
``allowance for loan and lease losses,'' and in paragraph (e)(5) remove 
the phrase ``allowance for loan and lease losses'' and add in their 
place ``allowance for loan and lease losses or adjusted allowance for 
credit losses, as applicable,'' and in paragraph (g) by removing 
``ALLL'' and adding in its place ``ALLL or AACL, as applicable''.
    The additions and revisions read as set forth below.


Sec.  324.173  Disclosures by certain advanced approaches FDIC-
supervised institutions.

* * * * *

              Table 2 to Sec.   324.173--Capital Structure
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
                                           (e)  (1) Whether the FDIC-
                                                 supervised institution
                                                 has elected to phase in
                                                 recognition of the
                                                 transitional amounts as
                                                 defined in Sec.
                                                 324.300(f).
                                     .........  (2) The FDIC-supervised
                                                 institution's common
                                                 equity tier 1 capital,
                                                 tier 1 capital, and
                                                 total capital without
                                                 including the
                                                 transitional amounts as
                                                 defined in Sec.
                                                 324.300(f).
------------------------------------------------------------------------


               Table 3 to Sec.   324.173--Capital Adequacy
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 
                              * * * * * * *
                                           (e)  (1) Common equity tier
                                                 1, tier 1 and total
                                                 risk-based capital
                                                 ratios reflecting the
                                                 transition provisions
                                                 described in Sec.
                                                 324.300(f):
                                     .........  (A) For the top
                                                 consolidated group; and
                                     .........  (2) For each depository
                                                 institution subsidiary.
                                           (f)  Common equity tier 1,
                                                 tier 1 and total risk-
                                                 based capital ratios
                                                 reflecting the full
                                                 adoption of CECL:
                                     .........  (1) For the top
                                                 consolidated group; and
                                     .........  (2) For each depository
                                                 institution subsidiary.
 
                              * * * * * * *
------------------------------------------------------------------------


[[Page 4248]]

* * * * *

Subpart G--Transition Provisions

0
58. Add Sec.  324.301 to subpart G to read as follows:


Sec.  324.301  Current expected credit losses (CECL) transition.

    (a) CECL transition provision criteria. (1) An FDIC-supervised 
institution may elect to use a CECL transition provision pursuant to 
this section only if the FDIC-supervised institution records a 
reduction in retained earnings due to the adoption of CECL as of the 
beginning of the fiscal year in which the FDIC-supervised institution 
adopts CECL.
    (2) An FDIC-supervised institution that elects to use the CECL 
transition provision must use the CECL transition provision in the 
first Call Report filed by the FDIC-supervised institution after it 
adopts CECL.
    (3) An FDIC-supervised institution that does not elect to use the 
CECL transition provision as of the first Call Report filed as 
described in paragraph (a)(2) of this section may not elect to use the 
CECL transition provision in subsequent reporting periods.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Transition period means the three-year period beginning the 
first day of the fiscal year in which an FDIC-supervised institution 
adopts CECL.
    (2) CECL transitional amount means the decrease net of any DTAs in 
the amount of an FDIC-supervised institution's retained earnings as of 
the beginning of the fiscal year in which the FDIC-supervised 
institution adopts CECL from the amount of the FDIC-supervised 
institution's retained earnings as of the closing of the fiscal year-
end immediately prior to the FDIC-supervised institution's adoption of 
CECL.
    (3) DTA transitional amount means the increase in the amount of an 
FDIC-supervised institution's DTAs arising from temporary differences 
as of the beginning of the fiscal year in which the FDIC-supervised 
institution adopts CECL from the amount of the FDIC-supervised 
institution's DTAs arising from temporary differences as of the closing 
of the fiscal year-end immediately prior to the FDIC-supervised 
institution's adoption of CECL.
    (4) AACL transitional amount means the difference in the amount of 
an FDIC-supervised institution's AACL as of the beginning of the fiscal 
year in which the FDIC-supervised institution adopts CECL and the 
amount of the FDIC-supervised institution's ALLL as of the closing of 
the fiscal year-end immediately prior to the FDIC-supervised 
institution's adoption of CECL.
    (5) Eligible credit reserves transitional amount means the increase 
in the amount of a FDIC-supervised institution's eligible credit 
reserves as of the beginning of the fiscal year in which the FDIC-
supervised institution adopts CECL from the amount of the FDIC-
supervised institution's eligible credit reserves as of the closing of 
the fiscal year-end immediately prior to the FDIC-supervised 
institution's adoption of CECL.
    (c) Calculation of CECL transition provision. (1) For purposes of 
the election described in paragraph (a)(1) of this section, an FDIC-
supervised institution must make the following adjustments in its 
calculation of regulatory capital ratios:
    (i) Increase retained earnings by seventy-five percent of its CECL 
transitional amount during the first year of the transition period, 
increase retained earnings by fifty percent of its CECL transitional 
amount during the second year of the transition period, and increase 
retained earnings by twenty-five percent of its CECL transitional 
amount during the third year of the transition period;
    (ii) Decrease amounts of DTAs arising from temporary differences by 
seventy-five percent of its DTA transitional amount during the first 
year of the transition period, decrease amounts of DTAs arising from 
temporary differences by fifty percent of its DTA transitional amount 
during the second year of the transition period, and decrease amounts 
of DTAs arising from temporary differences by twenty-five percent of 
its DTA transitional amount during the third year of the transition 
period;
    (iii) Decrease amounts of AACL by seventy-five percent of its AACL 
transitional amount during the first year of the transition period, 
decrease amounts of AACL by fifty percent of its AACL transitional 
amount during the second year of the transition period, and decrease 
amounts of AACL by twenty-five percent of its AACL transitional amount 
during the third year of the transition period;
    (iv) Increase average total consolidated assets as reported on the 
Call Report for purposes of the leverage ratio by seventy-five percent 
of its CECL transitional amount during the first year of the transition 
period, increase average total consolidated assets as reported on the 
Call Report for purposes of the leverage ratio by fifty percent of its 
CECL transitional amount during the second year of the transition 
period, and increase average total consolidated assets as reported on 
the Call Report for purposes of the leverage ratio by twenty-five 
percent of its CECL transitional amount during the third year of the 
transition period;
    (2) For purposes of the election described in paragraph (a)(1) of 
this section, an advanced approaches FDIC-supervised institution must 
make the following additional adjustments to its calculation of 
regulatory capital ratios:
    (i) Increase total leverage exposure for purposes of the 
supplementary leverage ratio by seventy-five percent of its CECL 
transitional amount during the first year of the transition period, 
increase total leverage exposure for purposes of the supplementary 
leverage ratio by fifty percent of its CECL transitional amount during 
the second year of the transition period, and increase total leverage 
exposure for purposes of the supplementary leverage ratio by twenty-
five percent of its CECL transitional amount during the third year of 
the transition period; and
    (ii) An advanced approaches FDIC-supervised institution that has 
completed the parallel run process and has received notification from 
the FDIC pursuant to Sec.  324.121(d) must decrease amounts of eligible 
credit reserves by seventy-five percent of its eligible credit reserves 
transitional amount during the first year of the transition period, 
decrease amounts of eligible credit reserves by fifty percent of its 
eligible credit reserves transitional amount during the second year of 
the transition provision, and decrease amounts of eligible credit 
reserves by twenty-five percent of its eligible credit reserves 
transitional amount during the third year of the transition period.
    (3) An advanced approaches FDIC-supervised institution that has 
completed the parallel run process and has received notification from 
the FDIC pursuant to Sec.  324.121(d), whose amount of expected credit 
loss exceeded its eligible credit reserves immediately prior to the 
adoption of CECL, and that has an increase in common equity tier 1 
capital as of the beginning of the fiscal year in which it adopts CECL 
after including the first year portion of the CECL transitional amount 
must decrease its CECL transitional amount used in paragraph (c) of 
this section by the full amount of its DTA transitional amount.
    (4) Notwithstanding any other requirement in this section, for 
purposes of this paragraph, in the event of a business combination 
involving an FDIC-supervised institution where one or both FDIC-
supervised institutions

[[Page 4249]]

have elected the treatment described in this section:
    (i) If the acquirer FDIC-supervised institution (as determined 
under GAAP) elected the treatment described in this section, the 
acquirer FDIC-supervised institution must continue to use the 
transitional amounts (unaffected by the business combination) that it 
calculated as of the date that it adopted CECL through the end of its 
transition period.
    (ii) If the acquired insured depository institution (as determined 
under GAAP) elected the treatment described in this section, any 
transitional amount of the acquired insured depository institution does 
not transfer to the resulting FDIC-supervised institution.

PART 325--CAPITAL MAINTENANCE

0
59. The authority citation for part 325 continues to read as follows:

    Authority:  12 U.S.C. 5365(i)(2); 12 U.S.C. 5412(b)(2)(C); 12 
U.S.C. 1818, 12 U.S.C. 1819(a)(Tenth), 12 U.S.C. 1831o, and 12 
U.S.C. 1831p-1.

Subpart C--Annual Stress Test

0
60. In Sec.  325.2, paragraph (g) is revised to read as follows:


Sec.  325.2  Definitions.

* * * * *
    (g) Provision for credit losses means:
    (1) Until December 31, 2019:
    (i) With respect to a state nonmember bank or state savings 
association that has not adopted the current expected credit losses 
methodology under U.S. generally accepted accounting principles (GAAP), 
the provision for loan and lease losses as reported on the Call Report 
in the current stress test cycle; and,
    (ii) With respect to a state nonmember bank or state savings 
association that has adopted the current expected credit losses 
methodology under GAAP, the provision for loan and lease losses, as 
would be calculated and reported on the Call Report by a state 
nonmember bank or state savings association that has not adopted the 
current expected credit losses methodology under GAAP; and
    (2) Beginning January 1, 2020:
    (i) With respect to a state nonmember bank or state savings 
association that has adopted the current expected credit losses 
methodology under GAAP, the provision for credit losses, as reported in 
the Call Report in the current stress test cycle; and
    (ii) With respect to a state nonmember bank or state savings 
association that has not adopted the current expected credit losses 
methodology under GAAP, the provision for loan and lease losses as 
would be reported in the Call Report in the current stress test cycle.
* * * * *

0
61. In Sec.  325.5, paragraph (a)(1) and (2) are revised to read as 
follows:


Sec.  325.5  Methodologies and practices.

    (a) * * *
    (1) Pre-provision net revenues, losses, provision for credit 
losses, and net income; and
    (2) The potential impact on the regulatory capital levels and 
ratios applicable to the covered bank, and any other capital ratios 
specified by the Corporation, incorporating the effects of any capital 
action over the planning horizon and maintenance of an allowance for 
loan losses or adjusted allowance for credit losses, as appropriate, 
for credit exposures throughout the planning horizon.
* * * * *

0
62. In Sec.  325.6, paragraph (b)(1) is revised to read as follows:


Sec.  325.6  Required reports of stress test results to the FDIC and 
the Board of Governors of the Federal Reserve System.

* * * * *
    (b) * * *
    (1) The reports required under paragraph (a) of this section must 
include under the baseline scenario, adverse scenario, severely adverse 
scenario and any other scenario required by the FDIC under this 
subpart, a description of the types of risks being included in the 
stress test, a summary description of the methodologies used in the 
stress test, and, for each quarter of the planning horizon, estimates 
of aggregate losses, pre-provision net revenue, provision for credit 
losses, net income, and pro forma capital ratios (including regulatory 
and any other capital ratios specified by the FDIC). In addition, the 
report must include an explanation of the most significant causes for 
the changes in regulatory capital ratios and any other information 
required by the FDIC.
* * * * *

0
63. In Sec.  325.7, revise paragraphs (c)(3) and (d)(1) to read as 
follows:


Sec.  325.7  Publication of stress test results.

* * * * *
    (c) * * *
    (3) Estimates of aggregate losses, pre-provision net revenue, 
provision for credit losses, net income, and pro forma capital ratios 
(including regulatory and any other capital ratios specified by the 
FDIC); and
* * * * *
    (d) * * *
    (1) The disclosure of aggregate losses, pre-provision net revenue, 
provisions for credit losses, and net income under this section must be 
on a cumulative basis over the planning horizon.
* * * * *

PART 327--ASSESSMENTS

0
64. The authority citation for part 327 continues to read as follows:

    Authority: 12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.

Subpart A--In General


Sec.  327.16  [Amended]

0
65. Section 327.16 is amended in footnote 2 to the table in paragraph 
(a)(1)(ii) by removing the words ``allowance for loan and lease 
financing receivable losses (ALLL)'' and adding in their place the 
words ``allowance for loan and lease financing receivable losses (ALLL) 
or allowance for credit losses, as applicable''.

PART 347--INTERNATIONAL BANKING

0
66. The authority citation for Part 347 continues to read as follows:

    Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103, 
3104, 3105, 3108, 3109; Pub L. No. 111-203, section 939A, 124 Stat. 
1376, 1887 (July 21, 2010) (codified 15 U.S.C. 78o-7 note).

Subpart C--International Lending

0
67. In Sec.  347.303, revise paragraphs (c)(2) and (4) to read as 
follows:


Sec.  347.303  Allocated transfer risk reserve.

* * * * *
    (c) * * *
    (2) Separate accounting. A banking institution shall account for an 
ATRR separately from the Allowance for Loan and Lease Losses or 
allowance for credit losses, as applicable, and shall deduct the ATRR 
from ``gross loans and leases'' to arrive at ``net loans and lease.'' 
The ATRR must be established for each asset subject to the ATRR in the 
percentage amount specified.
* * * * *
    (4) Alternative accounting treatment. A banking institution need 
not establish an ATRR if it writes down in the period in which the ATRR 
is required, or has written down in prior periods, the value of the 
specified international assets in the requisite amount for each such 
asset. For purposes of this paragraph (c)(4), international assets may 
be written down by a charge to the Allowance for Loan and Lease Losses 
or allowance for credit losses, as applicable, or a reduction in the 
principal amount of the asset by application of interest payments or 
other collections on the

[[Page 4250]]

asset; provided, that only those international assets that may be 
charged to the Allowance for Loan and Lease Losses or allowance for 
credit losses, as applicable, pursuant to U.S. generally accepted 
accounting principles may be written down by a charge to the Allowance 
for Loan and Lease Losses or allowance for credit losses, as 
applicable. However, the Allowance for Loan and Lease Losses or 
allowance for credit losses, as applicable, must be replenished in such 
amount necessary to restore it to a level which adequately provides for 
the estimated losses inherent in the banking institution's loan and 
lease portfolio.
* * * * *

PART 390--REGULATIONS TRANSFERRED FROM THE OFFICE OF THRIFT 
SUPERVISION

0
68. The authority citation for part 390 continues to read as follows:

    Authority: 12 U.S.C. 1819.

Subpart T--Accounting Requirements

0
69. In Sec.  390.384, in the appendix in section II, revise paragraph 
11, and in paragraph 12, remove the phrase ``provision for loan 
losses'' and add in its place ``provision for loan losses or provision 
for credit losses, as applicable''.
    The revision reads as follows:


Sec.  390.384  Financial statements for conversions, SEC filings, and 
offering circulars.

* * * * *

Appendix to Sec.  390.384 * * *

II. Income Statement

* * * * *
    11. Provision for loan losses or provision for credit losses, as 
applicable.
* * * * *

    Dated: December 18, 2018.
William A. Rowe,
Chief Risk Officer.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.
    Dated at Washington, DC, on December 18, 2018.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2018-28281 Filed 2-13-19; 8:45 am]
 BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P