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

[[Page 4222]]

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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

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.
---------------------------------------------------------------------------

\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).
---------------------------------------------------------------------------

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.

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.

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

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