Implementation of the Current Expected Credit Losses Methodology for Allowances, Related Adjustments to the Tier 1/Tier 2 Capital Rule, and Conforming Amendments, 49684-49690 [2019-19916]
Download as PDF
jbell on DSK3GLQ082PROD with PROPOSALS
49684
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Proposed Rules
Reserve funds would be kept within the
amount authorized in the Order.
A review of historical information and
preliminary information pertaining to
the upcoming fiscal period indicates
that the average grower price range for
the 2019–2020 season should be
approximately $1,598–$3,081 per ton of
Washington sweet cherries. Therefore,
the estimated assessment revenue for
the 2019–2020 fiscal period as a
percentage of total grower revenue
would be between 0.007 and 0.013
percent.
The Committee’s meetings are widely
publicized throughout the Washington
sweet cherry industry. All interested
persons are invited to attend the
meetings and participate in Committee
deliberations on all issues. Like all
Committee meetings, the May 8, 2019,
meeting was a public meeting and all
entities, both large and small, were able
to express views on this issue.
Interested persons are invited to submit
comments on this proposed rule,
including the regulatory and
information collection impacts of this
action on small businesses.
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
Chapter 35), the Order’s information
collection requirements have been
previously approved by the OMB and
assigned OMB No. 0581–0189, Fruit
Crops. No changes in those
requirements would be necessary
because of this action. Should any
changes become necessary, they would
be submitted to OMB for approval.
This proposed rule would not impose
any additional reporting or
recordkeeping requirements on either
small or large Washington sweet cherry
handlers. As with all Federal marketing
order programs, reports and forms are
periodically reviewed to reduce
information requirements and
duplication by industry and public
sector agencies.
AMS is committed to complying with
the E-Government Act, to promote the
use of the internet and other
information technologies to provide
increased opportunities for citizen
access to Government information and
services, and for other purposes.
USDA has not identified any relevant
Federal rules that duplicate, overlap, or
conflict with this proposed rule.
A small business guide on complying
with fruit, vegetable, and specialty crop
marketing agreements and orders may
be viewed at: https://www.ams.usda.gov/
rules-regulations/moa/small-businesses.
Any questions about the compliance
guide should be sent to Richard Lower
at the previously mentioned address in
VerDate Sep<11>2014
17:13 Sep 20, 2019
Jkt 247001
the FOR FURTHER INFORMATION CONTACT
section.
List of Subjects in 7 CFR Part 923
Cherries, Marketing agreements,
Reporting and recordkeeping
requirements.
For the reasons set forth in the
preamble, 7 CFR part 923 is proposed to
be amended as follows:
PART 923—MARKETING ORDER
REGULATING THE HANDLING OF
SWEET CHERRIES GROWN IN
DESIGNATED COUNTIES IN
WASHINGTON
1. The authority citation for 7 CFR
part 923 continues to read as follows:
■
Authority: 7 U.S.C. 601–674.
§ 923.236
[Amended]
2. Amend § 923.236 is as follows:
On and after April 1, 2019, an
assessment rate of $0.20 per ton is
established for the Washington Cherry
Marketing Committee.
■
Dated: September 17, 2019.
Bruce Summers,
Administrator, Agricultural Marketing
Service.
[FR Doc. 2019–20451 Filed 9–20–19; 8:45 am]
BILLING CODE 3410–02–P
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 615, 620, 621, 628
and 630
RIN 3052–AD36
Implementation of the Current
Expected Credit Losses Methodology
for Allowances, Related Adjustments
to the Tier 1/Tier 2 Capital Rule, and
Conforming Amendments
Farm Credit Administration.
Proposed rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, we, or our) is
inviting public comment on a proposal
to address changes to our capital and
other regulations, including certain
regulatory disclosure requirements, in
response to recent changes in the U.S.
generally accepted accounting
principles (U.S. GAAP).
DATES: You may send us comments on
or before November 22, 2019.
ADDRESSES: For accuracy and efficiency
reasons, please submit comments by
email or through the FCA’s website. We
do not accept comments submitted by
facsimile (fax), as faxes are difficult for
us to process in compliance with
section 508 of the Rehabilitation Act.
SUMMARY:
PO 00000
Frm 00005
Fmt 4702
Sfmt 4702
Please do not submit your comment
multiple times via different methods.
You may submit comments by any of
the following methods:
• Email: Send us an email at regcomm@fca.gov.
• FCA Website: https://www.fca.gov.
Click inside the ‘‘I want to . . .’’ field
near the top of the page; select
‘‘comment on a pending regulation’’
from the dropdown menu; and click
‘‘Go.’’
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Barry F. Mardock, Acting
Director, Office of Regulatory Policy,
Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102–5090.
You may review copies of all
comments we receive at our office in
McLean, Virginia, or on our website at
https://www.fca.gov. We will show your
comments as submitted, but for
technical reasons we may omit items
such as logos and special characters.
Identifying information that you
provide, such as phone numbers and
addresses, will be publicly available.
However, we will attempt to remove
email addresses to help reduce internet
spam.
To read comments online, go to
www.fca.gov, click inside the ‘‘I want to
. . .’’ field near the top of the page;
select ‘‘find comments on a pending
regulation’’ from the dropdown menu;
and click ‘‘Go.’’ This will take you to the
Comment Letters page where you can
select the regulation for which you
would like to read the public comments.
FOR FURTHER INFORMATION CONTACT:
Ryan Leist, Senior Accountant, Office of
Regulatory Policy, (703) 883–4223,
TTY (703) 883–4056; or
Jeremy R. Edelstein, Associate Director,
Finance and Capital Markets Team,
Office of Regulatory Policy, (703)
883–4497, TTY (703) 883–4056; or
Jennifer Cohn, Senior Counsel, Office of
General Counsel, (720) 213–0440,
TTY (703) 883–4056.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Objectives of the Proposed Rule
B. Overview of Changes to U.S. Generally
Accepted Accounting Principles
C. Regulatory Capital
II. Description of the Proposed Rule
A. Proposed Revisions to the Capital Rules
To Reflect the Change in U.S. GAAP
1. Introduction of Adjusted Allowances for
Credit Losses as a Newly Defined Term
2. Definition of Carrying Value
i. Available-for-Sale Debt Securities
ii. Purchased Credit Deteriorated Assets
3. Additional Considerations
B. Disclosures and Regulatory Reporting
E:\FR\FM\23SEP1.SGM
23SEP1
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Proposed Rules
C. Conforming Changes
D. Supervisory Guidance on the ACL
E. Additional Request for Comment
III. Timeframe for Implementation
IV. Regulatory Flexibility Act
I. Introduction
A. Objectives of the Proposed Rule
The objectives of the proposed rule
are to:
• Ensure that the System’s capital
requirements, including certain
regulatory disclosures, reflect the
current expected credit losses
methodology, which revises the
accounting for credit losses under U.S.
GAAP; and
• Ensure that conforming
amendments to other regulations
accurately reference credit losses.
B. Overview of Changes to U.S.
Generally Accepted Accounting
Principles
jbell on DSK3GLQ082PROD with PROPOSALS
In June 2016, the Financial
Accounting Standards Board (FASB)
issued Accounting Standards Update
(ASU) No. 2016–13, Topic 326,
Financial Instruments—Credit Losses,1
which revises the accounting for credit
losses under U.S. GAAP. In pertinent
part, ASU No. 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;
• Modifies the treatment of credit
losses on available-for-sale (AFS) debt
securities; and
• Requires certain disclosures of
credit quality indicators by year of
origination (or vintage). The new
accounting standard for credit losses
will apply to all System institutions.2
CECL differs from the incurred loss
methodology in several key respects.
CECL requires System institutions to
1 ASU No. 2016–13 introduces ASC Topic 326,
which covers measurement of credit losses on
financial instruments and includes three subtopics:
(i) Subtopic 10: Financial Instruments—Credit
Losses—Overall; (ii) Subtopic 20: Financial
Instruments—Credit Losses—Measured at
Amortized Cost; and (iii) Subtopic 30: Financial
Instruments—Credit Losses—Available-for-Sale
Debt Securities.
2 FCA regulation § 628.2 defines System
institution, for capital rule purposes, as a System
bank, an association, Farm Credit Leasing Services
Corporation, and any other FCA-chartered
institution that we determine should be subject to
our capital rules. FCA issued an Informational
Memorandum on September 1, 2016, New
Accounting Standard on Financial Instruments—
Credit Losses, which provided initial information
on CECL.
VerDate Sep<11>2014
17:13 Sep 20, 2019
Jkt 247001
recognize lifetime expected credit losses
for financial assets measured at
amortized cost, not just those credit
losses that have been incurred as of the
reporting date. CECL also requires the
incorporation of reasonable and
supportable forecasts in developing an
estimate of lifetime expected credit
losses, while maintaining the current
requirement for System institutions to
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.
Estimating expected credit losses over
the life of an asset under CECL,
including consideration of reasonable
and supportable forecasts, results in
earlier recognition of credit losses than
under the existing incurred loss
methodology.
In addition, CECL replaces multiple
impairment approaches in existing U.S.
GAAP. CECL allowances will cover a
broader range of financial assets than
allowance for loan losses (ALL) under
the incurred loss methodology. Under
the incurred loss methodology, in
general, ALL 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 a liability).3 These
exposures will be within the scope of
CECL. In addition, CECL covers credit
losses on held-to-maturity (HTM) debt
securities.
As mentioned above, ASU No. 2016–
13 also introduces PCD assets as a
replacement for PCI assets. The PCD
asset definition covers a broader range
of assets than the PCI asset definition.
CECL requires System institutions to
estimate and record credit loss
allowances for a PCD asset at the time
of purchase. The credit loss allowance
is then added to the purchase price to
determine the amortized cost basis of
the asset for financial reporting
purposes. Post-acquisition increases in
credit loss allowances on PCD assets
will be established through a charge to
earnings. This is different from the
current treatment of PCI assets, for
which System institutions are not
3 ‘‘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. We 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 00006
Fmt 4702
Sfmt 4702
49685
permitted to estimate and recognize
credit loss allowances at the time of
purchase. Rather, in general, credit loss
allowances for PCI assets are estimated
after the purchase only if there is
deterioration in the expected cash flows
from the assets.4
ASU No. 2016–13 also introduces
new requirements for Available-For-Sale
(AFS) debt securities. The new
accounting standard requires that a
System institution 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 System
institution 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, the
adjustment to credit loss allowances
would be recognized with offsetting
entries to deferred tax assets (DTAs), if
appropriate, and to the fiscal year’s
beginning retained earnings.
The effective date of ASU No. 2016–
13 varies for different banking
organizations. For banking organizations
that are public business entities (PBE)
but not SEC filers (as defined in U.S.
GAAP),5 ASU No. 2016–13 will become
effective for the first fiscal year
beginning after December 15, 2020,
including interim periods within that
fiscal year. The Federal Farm Credit
Banks Funding Corporation (Funding
Corporation) meets the definition of a
4 The System currently holds limited PCI assets,
which have generally been acquired through
business combinations. We do not believe the
amount of PCD assets in the System after the
adoption of CECL will be materially different.
5 A public business entity (PBE) that is not an SEC
filer includes: (1) An entity that has issued
securities that are traded, listed, or quoted on an
over-the-counter market, or (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. For further information on the
definition of a PBE, refer to ASU No. 2013–12,
Definition of a Public Business Entity, issued in
December 2013.
E:\FR\FM\23SEP1.SGM
23SEP1
49686
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Proposed Rules
PBE,6 and it is our understanding that
all System institutions will implement
the new standard for purposes of
System-wide combined financial
statements for the quarter ending March
31, 2021.
C. Regulatory Capital
Changes necessitated by CECL to a
System institution’s retained earnings,
DTAs, and allowances will affect its
regulatory capital ratios.7 Specifically,
retained earnings are a key component
of a System institution’s common equity
tier 1 (CET1) capital. An increase in a
System institution’s allowances,
including those estimated under CECL,
generally will reduce the institution’s
earnings or retained earnings, and
therefore its CET1 capital.8
Depending on the nature of the
difference, DTAs arising from temporary
differences (temporary difference DTAs)
are included in a System’s institution’s
risk-weighted assets or are deducted
from CET1 capital.9 Increases in
allowances generally give rise to
increases in temporary difference DTAs
that will partially offset the reduction in
earnings or retained earnings.10 Under
§ 628.20(d)(3), the ALL is included in a
System institution’s tier 2 capital up to
1.25 percent of its standardized total
risk-weighted assets not including any
amount of the ALL.11
jbell on DSK3GLQ082PROD with PROPOSALS
II. Description of the Proposed Rule
To address the forthcoming
implementation of changes to U.S.
GAAP resulting from the FASB’s
issuance of ASU No. 2016–13 and to
improve consistency between our
capital rules and U.S. GAAP, we
propose to amend our capital rules to
6 The Funding Corporation is the fiscal agent and
disclosure agent for the System. The Funding
Corporation is responsible for issuing and
marketing debt securities to finance the System’s
loans, leases, and operations and for preparing and
producing the System’s financial results.
7 These capital ratios are specified in FCA
regulation § 628.10.
8 However, allowances recognized on PCD assets
upon adoption of CECL and upon later purchases
of PCD assets generally would not reduce the
System institution’s earnings, retained earnings, or
CET1 capital.
9 DTAs arising from temporary differences in
relation to net operating loss carrybacks are riskweighted at 100 percent under § 628.32(l)(3). DTAs
that arise from net operating loss and tax credit
carryforwards, net of any related valuation
allowances and net of deferred tax liabilities in
accordance with § 628.22(e), are deducted from
CET1 capital under § 628.22(a)(3). All other DTAs
are risk-weighted at 100 percent under
§ 628.32(l)(5). DTAs are immaterial at most System
institutions.
10 See Accounting Standards Codification Topic
740, ‘‘Income Taxes.’’
11 Under § 628.2, any amount of ALL greater than
the 1.25 percent limit is deducted from
standardized total risk-weighted assets.
VerDate Sep<11>2014
17:13 Sep 20, 2019
Jkt 247001
identify which credit loss allowances
under the new accounting standard are
eligible for inclusion in a System
institution’s regulatory capital.12 In
particular, FCA is proposing to add
adjusted allowances for credit losses
(AACL) as a newly defined term in the
capital rules. AACL would include
credit loss allowances related to
financial assets, except for allowances
for PCD assets and AFS debt
securities.13 AACL would be eligible for
inclusion in a System institution’s tier
2 capital subject to the current limit for
including ALL in tier 2 capital under
the capital rules.
The proposal also would provide a
separate capital treatment for
allowances associated with AFS debt
securities and PCD assets that would
apply to System institutions upon
adoption of ASU 2016–13; revise
regulatory disclosure requirements that
would apply to System banks following
their adoption of CECL; 14 and make
conforming amendments to the FCA’s
other regulations that refer to credit loss
allowances to reflect the
implementation of ASU No. 2016–13.
Our capital rules are similar to the
standardized approach capital rules that
the Federal banking regulatory agencies
(FBRAs) 15 adopted for the banking
organizations they regulate, while taking
into account the cooperative structure
and the organization of the System. The
FBRAs published a CECL rule in
February 2019.16 Our proposal is very
similar to the FBRAs’ rule.17
12 Note that § 621.3 requires institutions to
prepare financial statements in accordance with
GAAP, except as otherwise directed by statutory
and regulatory requirements.
13 This exclusion of credit loss allowances on
PCD assets and AFS debt securities is what
differentiates AACL from the term allowance for
credit losses (ACL), which is used by the FASB in
ASU 2016–13 and which applies to both financial
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.
14 Section 628.63 requires System banks to
disclose items such as capital structure, capital
adequacy, credit risk, and credit risk mitigation.
15 The FBRAs are the Office of the Comptroller of
the Currency, the Board of Governors of the Federal
Reserve System, and the Federal Deposit Insurance
Corporation.
16 84 FR 4222 (February 14, 2019).
17 FCA staff met with System representatives
during the development of this rule to seek their
input on certain issues. The questions discussed
were similar to the questions asked in the preamble
to the FBRA’s proposed CECL rule. (83 FR 22312,
May 14, 2018). We considered this input in
developing this proposal.
PO 00000
Frm 00007
Fmt 4702
Sfmt 4702
A. Proposed Revisions to the Capital
Rules To Reflect the Change in U.S.
GAAP
1. Introduction of Adjusted Allowances
for Credit Losses as a Newly Defined
Term
FCA is proposing to revise the capital
rules to reflect the revised accounting
standard for credit losses under U.S.
GAAP as it relates to System
institutions’ calculation of regulatory
capital ratios. Under the proposal, the
new capital term AACL, rather than
ALL, would apply to all System
institutions. Consistent with the
treatment of ALL under FCA’s capital
rules, amounts of AACL would be
eligible for inclusion in an institution’s
tier 2 capital up to 1.25 percent of the
institution’s standardized total riskweighted assets not including any
amount of the AACL.
CECL allowances cover a broader
range of financial assets than ALL under
the incurred loss methodology. Under
the capital rules, ALL 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 and the amount
expected to be collected on the financial
assets (i.e., lifetime credit losses). Thus,
AACL would include allowances for
expected credit losses on HTM debt
securities and lessors’ net investments
in leases that have been established to
reduce these assets to amounts expected
to be collected, as determined in
accordance with U.S. GAAP. AACL also
would include 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
would not be included in the definition
of AACL.
2. Definition of Carrying Value
FCA is proposing to revise the
regulatory definition of carrying value
under the capital rules to provide that,
for all assets other than AFS debt
securities and PCD assets, the carrying
value is not reduced by any associated
credit loss allowance.
i. Available-for-Sale Debt Securities
Current accounting standards require
a System institution to make an
individual assessment of each of its AFS
E:\FR\FM\23SEP1.SGM
23SEP1
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Proposed Rules
jbell on DSK3GLQ082PROD with PROPOSALS
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 also results in
a reduction in the same amount of the
carrying value of the AFS debt security.
ASU No. 2016–13 revises the
accounting for credit impairment of AFS
debt securities by requiring System
institutions 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
proposal, all credit losses recognized on
AFS debt securities would flow through
to 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 would not be eligible for
inclusion in a System institution’s tier
2 capital.
ii. Purchased Credit Deteriorated Assets
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
System institution 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 System
institution’s balance sheet will not be
established through a charge to
earnings. Post-acquisition increases in
allowances for PCD assets will be
established through a charge against
earnings.
Including in tier 2 capital allowances
that have not been charged against
earnings would diminish the quality of
regulatory capital. Accordingly, FCA is
proposing to maintain the requirement
that valuation allowances be charged
against earnings in order to be eligible
for inclusion in tier 2 capital. FCA is
also clarifying that valuation allowances
that are charged to retained earnings in
accordance with U.S. GAAP (i.e., the
allowances required at CECL adoption)
VerDate Sep<11>2014
17:13 Sep 20, 2019
Jkt 247001
are eligible for inclusion in tier 2
capital.
As in the FBRAs’ final rule, FCA is
not proposing to allow System
institutions to bifurcate PCD allowances
to include post-acquisition allowances
in the definition of AACL; we are
concerned that a bifurcated approach
could create undue complexity and
burden for System institutions when
determining the amount of credit loss
allowances for PCD assets eligible for
inclusion in tier 2 capital. In addition,
System institutions have very little, if
any, allowances for PCI assets and, as
discussed above, this will not change
with the change to PCD assets.
Therefore, the proposal excludes all
PCD allowances from being included in
tier 2 capital.18 The proposal also
revises the definition of carrying value
such that for PCD assets the carrying
value is calculated net of allowances.
This treatment of PCD assets would, in
effect, reduce a System institution’s
standardized total risk-weighted assets,
similar to the proposed treatment for
credit loss allowances for AFS debt
securities.
3. Additional Considerations
As in the FBRAs’ final rule, FCA is
not proposing to change the limit of 1.25
percent of risk-weighted assets
governing the amount of AACL eligible
for inclusion in tier 2 capital. Should
this limit be finalized as proposed, FCA
intends to monitor the effects of this
limit on regulatory capital and System
institution lending practices. This
ongoing monitoring will include the
review of data, including data provided
by System institutions, and will assist
FCA in determining whether a further
change to the capital rules’ treatment of
AACL might be warranted. To the extent
FCA determines that further revisions to
the capital rules are necessary, we
would seek comment through a separate
proposal.
In addition, unlike the FBRAs, FCA is
not proposing a phase-in of the day-one
effects of CECL on regulatory capital
ratios. The FBRAs included an optional
three-year transition period for banking
organizations to reduce the potential
day-one adverse effects that CECL may
have on a banking organization’s
regulatory capital ratios. The FBRAs
included this transition period because
18 This proposal excludes both initial PCD
allowances and post-acquisition PCD allowances
from being included in tier 2 capital. As noted
above, the initial allowance for a PCD asset will not
be established through a charge to earnings (the
allowance is estimated on the date of acquisition).
However, post-acquisition increases in allowances
for PCD assets are established through a charge
against earnings.
PO 00000
Frm 00008
Fmt 4702
Sfmt 4702
49687
of concerns that some banking
organizations might face difficulties in
capital planning because of uncertainty
about the economic environment at the
time of CECL adoption.19
The FBRAs will use a banking
organization’s regulatory capital ratios,
as adjusted by the transition provision,
to determine whether the organization is
in compliance with its regulatory capital
requirements (including capital buffer
and prompt corrective action (PCA)
requirements). However, the FBRAs will
continue to examine banking
organizations’ credit loss estimates and
allowance balances through the
supervisory process regardless of
whether they have elected to use the
transition provision. In addition, the
FBRAs may examine whether banking
organizations will have adequate
amounts of capital at the expiration of
the transition provision period.20
We are not proposing a transition
period for the following reasons.
First, a transition provision appears to
be unnecessary for any System
institution because, even without a
transition period, they are all expected
to be sufficiently capitalized to absorb
the day one impact of CECL for the
purpose of complying with regulatory
capital requirements. In particular, if the
allowances as estimated under CECL
increase, CET1 capital (including
retained earnings) will decrease and tier
2 capital will increase; 21 we believe
total capital will be largely unchanged
at the majority of System institutions.
Even though a transition period like the
FBRAs adopted would not affect the
FCA’s supervisory oversight, we do not
anticipate the impacts of CECL
prompting any increase in supervisory
concern or response. Moreover, the
capital ratios of all System
institutions—CET1; Tier 1; Total
Capital; and Tier 1 Leverage—are
expected to remain above the regulatory
minimums and buffers after the
implementation of CECL, even without
a transition period. An institution’s
ability to provide loans and related
services without a transition provision
would be hindered only if the
19 CECL requires consideration of current and
future expected economic conditions to estimate
allowances. To an extent, these conditions will not
be known until closer to an institution’s CECL
adoption date.
20 84 FR 4229 (February 14, 2019).
21 As of March 31, 2019, the combined Systemwide allowance for loan losses and reserve for
losses on unfunded commitments as a percentage
of risk weighted assets was 0.57 percent. As
mentioned above, under revised § 628.20(d)(3), the
AACL would be included in a System institution’s
tier 2 capital up to 1.25 percent of its standardized
total risk-weighted assets not including any amount
of the AACL.
E:\FR\FM\23SEP1.SGM
23SEP1
jbell on DSK3GLQ082PROD with PROPOSALS
49688
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Proposed Rules
institution’s capital measures would fall
below its regulatory capital
requirements without the transition
provision.22
Second, we believe either an optional
or a mandatory transition period would
lead to unnecessary complexity and
operational burden that is not warranted
in light of our belief that a transition
period is not needed. An optional
transition period, like that adopted by
the FBRAs, could be difficult to
implement and maintain for System
institutions in at least two districts that
make use of common standardized
applications for computing and
reporting regulatory capital. A transition
period utilized by some institutions in
such districts but not by others would
appear to complicate supporting the
common reporting platforms for those
institutions. In addition, allowing an
optional transition period would create
a lack of comparability among System
institutions’ capital levels.
A mandatory transition period might
not be wanted by institutions that
already have plans to absorb the dayone impact of CECL and have incurred
sunk costs in making changes to
processes for calculating and reporting
regulatory capital ratios for FCA
Uniform Reports of Financial Condition
and Performance (Call Reports) and
shareholder reporting.
Closer to the adoption of CECL, and
in the unlikely event that its day-one
impact threatens regulatory capital
compliance or patronage practices, FCA
may consider other options to reduce
unanticipated impacts of the accounting
change. The type of action would
depend on the materiality of CECL’s
impact and how widespread the issue is
throughout the System.
We request comment on the following
issues relative to a transition period:
1. We invite comment on whether
FCA should adopt a transition period
for the day-one impact CECL may have
on an institution’s regulatory capital
ratios. If you believe we should adopt a
transition period, please explain
whether you believe it should be
mandatory or optional, and please
address the reasons we have discussed
for not proposing a transition period.
Please provide analysis to support your
position.
2. We invite comment on alternatives
to a transition period that might
accommodate institutions in their
implementation of the CECL
requirements. Please explain what these
22 Unlike the banking organizations regulated by
the FBRAs, System institutions have no PCA
requirements and therefore have no concerns about
triggering such requirements.
VerDate Sep<11>2014
17:13 Sep 20, 2019
Jkt 247001
alternatives are and why they would be
necessary. Please explain why our
reasons for not proposing a transition
period would not apply to these
alternatives. Please provide analysis to
support your position.
B. Disclosures and Regulatory Reporting
Under the proposed rule, System
banks would be required to update their
disclosures required under § 628.63 to
reflect the adoption of CECL. For
example, System banks would be
required to disclose AACL instead of
ALL after adoption.
In addition, to reflect changes in U.S.
GAAP, FCA anticipates revising the Call
Reports as part of its annual review
process. These revisions would specify
the affected line items in the capital
schedules and the newly defined term
AACL. In addition, FCA intends to
update instructions for all affected Call
Report schedule references to ALL. If we
adopt this rule as proposed, we expect
to make these changes for the March 31,
2021 reporting period.
C. Conforming Changes
A number of existing FCA regulations
outside of Part 628 refer to ALL or to
‘‘loan loss.’’ ASU No. 2016–13 removes
impairment approaches and related
terminology, including replacing the
term ALL with allowance for credit
losses (ACL). The proposed rule would
replace the references to ALL or ‘‘loan
loss’’ in our regulations with references
to ACL or ‘‘credit loss,’’ as appropriate.
In addition, several regulations that
refer to ‘‘allowance for losses’’ more
appropriately should refer to ACL.
Both the part 620 regulations
governing the contents of the annual
report to shareholders and the part 630
regulations governing the contents of
the annual report to investors require
that the discussion and analysis of risk
exposures analyze the allowance for
loan losses. The proposal would amend
the analysis requirement for consistency
with ASU No. 2016–13, which requires
an analysis of the allowance for credit
losses by year of origination (vintage
year) and the allowance be supported by
reasonable and supportable forecasts.
The proposal would also replace terms
in the requirement that references ‘‘loan
loss’’ with references to ‘‘credit loss,’’ as
appropriate.
In the capital rules codified at part
628, as well as in other regulations that
refer to the capital rules, the proposal
would replace references to ALL with
AACL. In the capital disclosures at
§ 628.63, references to ‘‘probable loan
losses’’ and ‘‘loan losses’’ would be
updated with ACL or AACL, as
applicable.
PO 00000
Frm 00009
Fmt 4702
Sfmt 4702
The proposed rule would make
conforming changes in regulations in
the following parts:
• Part 611—Organization
• Part 615—Funding and Fiscal Affairs,
Loan Policies and Operations, and
Funding Operations
• Part 620—Disclosure to Shareholders
• Part 621—Accounting and Reporting
Requirements
• Part 628—Capital Adequacy of
System Institutions
• Part 630—Disclosure to Investors in
System-Wide and Consolidated Bank
Debt Obligations of the Farm Credit
System.
D. Supervisory Guidance on the ACL
If this rule is adopted, we expect to
issue supervisory guidance on the ACL.
Until that time, many concepts,
processes, and practices detailed in
existing supervisory guidance on the
ALL would continue to remain relevant
under CECL. Relevant guidance
includes, but is not limited to,
information related to management’s
responsibility for the allowance
estimation process, the board of
directors’ responsibility for overseeing
management’s process, and the need for
institutions to appropriately support
and document their allowance
estimates.23 Until new guidance is
issued, institutions should consider the
relevant sections of existing ALL
guidance in their implementation of the
new accounting standard.
E. Additional Request for Comment
FCA seeks comment on all aspects of
the proposal. Comments are requested
about the potential impact, if any, of the
proposal in ensuring the safety and
soundness of individual System
institutions as well as on the stability of
the Farm Credit System.
III. Timeframe for Implementation
We intend the effective date of the
final rule to be January 1, 2021. As
mentioned above, the effective date of
ASU No. 2016–13 will become effective
for the Funding Corporation for the first
fiscal year beginning after December 15,
2020, including interim periods within
that fiscal year, and System institutions
will implement the new standard for
purposes of System-wide combined
financial statements for the Call Report
quarter ending March 21, 2021.
23 Existing supervisory guidance includes: FCA
Bookletter 49, Adequacy of Farm Credit System
Institutions’ Allowance for Loan Losses and Risk
Funds, April 26, 2004; FCA Informational
Memorandum, Computer-Based Model Validation
Expectations, June 17, 2002; FCA Informational
Memorandum, Allowance for Loan Losses, June 30,
2009; and FCA Exam Manual, Allowance for Loan
Losses, November 17, 2015.
E:\FR\FM\23SEP1.SGM
23SEP1
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Proposed Rules
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), FCA hereby certifies that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities.
Each of the banks in the System,
considered together with its affiliated
associations, has assets and annual
income in excess of the amounts that
would qualify them as small entities.
Therefore, System institutions are not
‘‘small entities’’ as defined in the
Regulatory Flexibility Act.
Lists of Subjects
12 CFR Part 611
§ 611.515
§ 611.1122
§ 611.1223
■
Accounting, Agriculture, Banks,
banking, Reporting and recordkeeping
requirements, Rural areas.
12 CFR Part 621
Accounting, Agriculture, Banks,
banking, Reporting and recordkeeping
requirements, Rural areas.
12 CFR Part 628
Accounting, Agriculture, Banks,
banking, Capital, Government securities,
Investments, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks,
banking, Organization and functions
(Government agencies), Reporting and
recordkeeping requirements, Rural
areas.
For the reasons stated in the
preamble, the Farm Credit
Administration proposes to amend parts
611, 615, 620, 621, 628, and 630 of
chapter VI, title 12 of the Code of
Federal Regulations as follows:
PART 611—ORGANIZATION
1. The authority citation for part 611
is revised to read as follows:
■
Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12,
1.13, 2.0, 2.1, 2.2, 2.10, 2.11, 2.12, 3.0, 3.1,
3.2, 3.3, 3.7, 3.8, 3.9, 4.3A, 4.12, 4.12A, 4.15,
4.20, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25,
7.0–7.3, 7.6–7.13, 8.5(e) of the Farm Credit
Act (12 U.S.C. 2002, 2011, 2012, 2013, 2020,
2021, 2071, 2072, 2073, 2091, 2092, 2093,
2121, 2122, 2123, 2124, 2128, 2129, 2130,
2154a, 2183, 2184, 2203, 2208, 2211, 2212,
2213, 2214, 2243, 2252, 2261, 2279a–2279a–
3, 2279b–2279f–1, 2279aa–5(e)); secs. 411
Jkt 247001
[Amended]
[Amended]
5. Amend § 611.1223 paragraph
(c)(23)(ii) by removing the words
‘‘allowance for losses’’ and adding in its
place the words ‘‘allowance for credit
losses’’.
§ 611.1250
[Amended]
6. Amend § 611.1250 paragraph
(b)(5)(i)(B) by removing the words
‘‘loan’’ and adding in its place the
words ‘‘credit’’.
[Amended]
7. Amend § 611.1255 paragraph
(b)(5)(i)(B) by removing the words
‘‘general allowance for losses’’ and
adding in its place the words ‘‘general
allowance for credit losses’’.
■
PART 615—FUNDING AND FISCAL
AFFAIRS, LOAN POLICIES AND
OPERATIONS, AND FUNDING
OPERATIONS
8. The authority citation for part 615
is revised to read as follows:
■
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12,
2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,
4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 8.0, 8.3, 8.4,
8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073,
2074, 2075, 2076, 2093, 2122, 2128, 2132,
2146, 2154, 2154a, 2160, 2202b, 2211, 2243,
2252, 2279aa, 2279aa–3, 2279aa–4, 2279aa–6,
2279aa–8, 2279aa–10, 2279aa–12); sec.
301(a), Pub. L. 100–233, 101 Stat. 1568, 1608
(12 U.S.C. 2154 note); sec. 939A, Pub. L. 111–
203, 124 Stat. 1326, 1887 (15 U.S.C. 78o–7
note).
§ 615.5050
[Amended]
9. Amend § 615.5050 by:
a. Removing in paragraph (c)(1), the
words ‘‘allowance for loan losses’’ and
■
■
PO 00000
Frm 00010
Fmt 4702
[Amended]
10. Amend § 615.5132 paragraph (a)
by removing the words ‘‘loan loss
adjustments’’ and adding in its place the
words ‘‘credit loss adjustments’’.
§ 615.5140
[Amended]
11. Amend § 615.5140 paragraph
(b)(4)(ii) by removing the words ‘‘loan
loss’’ and adding in its place the words
‘‘credit loss’’.
■
[Amended]
12. Amend § 615.5200 paragraph
(c)(4) by adding the word ‘‘credit’’
before ‘‘losses’’.
■
§ 615.5201
[Amended]
13. Amend § 615.5201 by removing
the words ‘‘allowance for loan losses’’
and adding in its place the words
‘‘adjusted allowance for credit losses’’ in
the definition of ‘‘Risk-adjusted asset
base’’.
■
§ 615.5351
[Amended]
14. Amend § 615.5351 paragraph (d)
by adding the word ‘‘credit’’ before
‘‘loss.’’
■
■
§ 611.1255
§ 615.5132
§ 615.5200
4. Amend § 611.1130 paragraph
(b)(4)(i) by removing the words
‘‘allowance for losses’’ and adding in its
place the words ‘‘allowance for credit
losses’’.
12 CFR Part 620
17:13 Sep 20, 2019
[Amended]
3. Amend § 611.1122 by:
a. Removing in paragraph (e)(6)(iii),
the word ‘‘loan’’ and adding in its place
the word ‘‘credit’’; and
■ b. Removing in paragraph (e)(10), the
words ‘‘loan losses’’ and adding in its
place the words ‘‘credit losses’’ both
places it appears.
■
■
Accounting, Agriculture, Banks,
banking, Government securities,
Investments, Rural areas.
adding in its place the words
‘‘allowance for credit losses’’; and
■ b. Removing in paragraphs (c)(2)
through (4) the words ‘‘allowance for
losses’’ and adding in its place the
words ‘‘allowance for credit losses’’.
■
■
12 CFR Part 615
VerDate Sep<11>2014
[Amended]
2. Amend § 611.515 paragraph
(b)(6)(ii)(E) by removing the word
‘‘loan’’ and adding in its place the word
‘‘credit’’.
■
§ 611.1130
Agriculture, Banks, banking, Rural
areas.
jbell on DSK3GLQ082PROD with PROPOSALS
and 412 of Pub. L. 100–233, 101 Stat. 1568,
1638 (12 U.S.C. 2071 note and § 2202 note).
49689
Sfmt 4702
PART 620—DISCLOSURE TO
SHAREHOLDERS
15. The authority citation for part 620
continues to read as follows:
■
Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17,
5.19 of the Farm Credit Act (12 U.S.C. 2154,
2154a, 2207, 2243, 2252, 2254).
§ 620.5
[Amended]
16. Amend § 620.5 by:
a. Removing in paragraph (f)(1)(i)(D),
the words ‘‘Allowance for losses’’ and
adding in its place the words
‘‘Allowance for credit losses’’;
■ b. Removing in paragraph (f)(1)(ii)(B),
the words ‘‘Provision for loan losses’’
and adding in its place the words
‘‘Provision for credit losses’’;
■ c. Removing in paragraph (f)(1)(iii)(F),
the words ‘‘Allowance for loan lossesto-loans’’ and adding in its place the
words ‘‘Allowance for credit losses-toloans’’;
■ d. Revising paragraph (g)(1)(iv)(B);
■ e. Removing in paragraph (g)(1)(iv)(E),
the words ‘‘allowance for losses’’ and
adding in its place the words
‘‘allowance for credit losses.’’
The revision reads as follows:
* * *
(g) * * *
(1) * * *
■
■
E:\FR\FM\23SEP1.SGM
23SEP1
49690
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Proposed Rules
(iv) * * *
(B) An analysis of the allowance for
credit losses by year of origination
(vintage year). The number of years
analyzed must be consistent with
vintage year disclosures required by
generally accepted accounting
principles. The analysis must include
the ratios of the allowance for credit
losses to loans and net chargeoffs to
average loans and a discussion of the
adequacy of the allowance for credit
losses given reasonable and supportable
forecasts;
*
*
*
*
*
PART 621—ACCOUNTING AND
REPORTING REQUIREMENTS
17. The authority citation for part 621
is revised to read as follows:
■
Authority: Secs. 5.17, 5.19, 5.22A, 8.11 of
the Farm Credit Act (12 U.S.C. 2252, 2257a,
2279aa–11).
§ 621.5
[Amended]
18. Amend § 621.5 by:
a. Removing in the heading, the word
‘‘loan’’ and adding in its place the word
‘‘credit’’; and
■ b. Removing in paragraphs (a) and (b),
the word ‘‘loan’’ and adding in its place
the word ‘‘credit’’.
■
■
§ 621.8
[Amended]
19. Amend § 621.8 paragraph (c)(2) by
removing the word ‘‘loan’’ and adding
in its place the word ‘‘credit’’.
■
PART 628—CAPITAL ADEQUACY OF
SYSTEM INSTITUTIONS
20. The authority citation for part 628
is revised to read as follows:
■
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12,
2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,
4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 8.0, 8.3, 8.4,
8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073,
2074, 2075, 2076, 2093, 2122, 2128, 2132,
2146, 2154, 2154a, 2160, 2202b, 2211, 2243,
2252, 2279aa, 2279aa–3, 2279aa–4, 2279aa–6,
2279aa–8, 2279aa–10, 2279aa–12); sec.
301(a), Pub. L. 100–233, 101 Stat. 1568, 1608
(12 U.S.C. 1254 note); sec. 939A, Pub. L. 111–
203, 124 Stat. 1326, 1887 (15 U.S.C. 78o–7
note).
§ 628.2
[Amended]
21. Amend § 628.2 by:
a. Adding in alphabetical order a
definition for ‘‘Adjusted allowances for
credit loss (AACL)’’;
■ b. Removing the definition of
‘‘Allowances for loan losses (ALL)’’; and
■ c. Adding in the definition ‘‘Carrying
value’’ a new last sentence;
■ d. Revising ‘‘Standardized total riskweighted assets’’ definitions second
paragraph (2).
The additions and revision reads as
follows:
jbell on DSK3GLQ082PROD with PROPOSALS
■
■
VerDate Sep<11>2014
17:13 Sep 20, 2019
Jkt 247001
§ 628.2
Definitions
*
*
*
*
*
Adjusted allowances for credit losses
(AACL) means 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 includes
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
excludes allowances created that reflect
credit losses on purchased credit
deteriorated assets and available-for-sale
debt securities.
*
*
*
*
*
Carrying value * * * For all assets
other than available-for-sale debt
securities or purchased creditdeteriorated assets, the carrying value is
not reduced by any associated credit
loss allowance that is determined in
accordance with GAAP.
*
*
*
*
*
Standardized total risk-weighted
assets means:
* * *
(2) Any amount of the System
institution’s adjusted allowance for
credit losses that is not included in tier
2 capital.
*
*
*
*
*
§ 628.20
[Amended]
22. Amend § 628.20 paragraph (d)(3)
by removing the word ‘‘ALL’’ and
adding in its place the word ‘‘AACL’’
each place it appears.
■
§ 628.22
[Amended]
23. Amend § 628.22 paragraph (c) by
removing the word ‘‘ALL’’ in footnote 6
and adding in its place the word
‘‘AACL’’.
■
§ 628.63
[Amended]
24. Amend Table 5 to Section
628.63—Credit Risk: General
Disclosures by:
■ a. Removing in paragraphs (a)(5),
(e)(5), and (g), the words ‘‘allowance for
loan losses’’ and adding in its place the
words ‘‘adjusted allowance for credit
losses’’; and
■ b. Removing in footnote 6, the words
‘‘probable loan losses’’ and adding in its
place the words ‘‘credit losses’’.
■
PO 00000
Frm 00011
Fmt 4702
Sfmt 9990
PART 630—DISCLOSURE TO
INVESTORS IN SYSTEMWIDE AND
CONSOLIDATED BANK DEBT
OBLIGATIONS OF THE FARM CREDIT
SYSTEM
25. The authority citation for part 630
is revised to read as follows:
■
Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of
the Farm Credit Act (12 U.S.C. 2153, 2160,
2243, 2252, 2254).
§ 630.20
[Amended]
26. Amend § 630.20 by:
a. Removing in paragraph (f)(1)(ii), the
words ‘‘Allowance for losses’’ and
adding in its place the words
‘‘Allowance for credit losses’’;
■ b. Removing in paragraph (f)(2)(iii),
the words ‘‘Provision for loan losses’’
and adding in its place the words
‘‘Provision for credit losses’’;
■ c. Removing in paragraph (f)(3)(v), the
words ‘‘Allowance for losses’’ and
adding in its place the words
‘‘Allowance for credit losses’’ and
■ d. Revising paragraph (g)(1)(ii)(B).
The revision reads as follows:
* * *
(B) An analysis of the allowance for
credit losses by year of origination
(vintage year). The number of years
analyzed must be consistent with
vintage year disclosures required by
generally accepted accounting
principles. The analysis must include
the ratios of the allowance for loan
credit losses to loans and net chargeoffs
to average loans and a discussion of the
adequacy of the allowance for credit
losses given reasonable and supportable
forecasts.
*
*
*
*
*
■
■
Appendix A to Part 630—Supplemental
Information Disclosure Guidelines
[Amended]
27. Amend Appendix A to Part 630 by
removing the words ‘‘loan losses’’ and
adding in its place the words ‘‘credit
losses’’ in Table B wherever they
appear.
■
Dated: August 14, 2019.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2019–19916 Filed 9–20–19; 8:45 am]
BILLING CODE 6705–01–P
E:\FR\FM\23SEP1.SGM
23SEP1
Agencies
[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Proposed Rules]
[Pages 49684-49690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19916]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 615, 620, 621, 628 and 630
RIN 3052-AD36
Implementation of the Current Expected Credit Losses Methodology
for Allowances, Related Adjustments to the Tier 1/Tier 2 Capital Rule,
and Conforming Amendments
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we, or our) is inviting
public comment on a proposal to address changes to our capital and
other regulations, including certain regulatory disclosure
requirements, in response to recent changes in the U.S. generally
accepted accounting principles (U.S. GAAP).
DATES: You may send us comments on or before November 22, 2019.
ADDRESSES: For accuracy and efficiency reasons, please submit comments
by email or through the FCA's website. We do not accept comments
submitted by facsimile (fax), as faxes are difficult for us to process
in compliance with section 508 of the Rehabilitation Act. Please do not
submit your comment multiple times via different methods. You may
submit comments by any of the following methods:
Email: Send us an email at [email protected].
FCA Website: https://www.fca.gov. Click inside the ``I want
to . . .'' field near the top of the page; select ``comment on a
pending regulation'' from the dropdown menu; and click ``Go.''
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Barry F. Mardock, Acting Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia, or on our website at https://www.fca.gov. We will show
your comments as submitted, but for technical reasons we may omit items
such as logos and special characters. Identifying information that you
provide, such as phone numbers and addresses, will be publicly
available. However, we will attempt to remove email addresses to help
reduce internet spam.
To read comments online, go to www.fca.gov, click inside the ``I
want to . . .'' field near the top of the page; select ``find comments
on a pending regulation'' from the dropdown menu; and click ``Go.''
This will take you to the Comment Letters page where you can select the
regulation for which you would like to read the public comments.
FOR FURTHER INFORMATION CONTACT:
Ryan Leist, Senior Accountant, Office of Regulatory Policy, (703) 883-
4223, TTY (703) 883-4056; or
Jeremy R. Edelstein, Associate Director, Finance and Capital Markets
Team, Office of Regulatory Policy, (703) 883-4497, TTY (703) 883-4056;
or
Jennifer Cohn, Senior Counsel, Office of General Counsel, (720) 213-
0440, TTY (703) 883-4056.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Objectives of the Proposed Rule
B. Overview of Changes to U.S. Generally Accepted Accounting
Principles
C. Regulatory Capital
II. Description of the Proposed Rule
A. Proposed Revisions to the Capital Rules To Reflect the Change
in U.S. GAAP
1. Introduction of Adjusted Allowances for Credit Losses as a
Newly Defined Term
2. Definition of Carrying Value
i. Available-for-Sale Debt Securities
ii. Purchased Credit Deteriorated Assets
3. Additional Considerations
B. Disclosures and Regulatory Reporting
[[Page 49685]]
C. Conforming Changes
D. Supervisory Guidance on the ACL
E. Additional Request for Comment
III. Timeframe for Implementation
IV. Regulatory Flexibility Act
I. Introduction
A. Objectives of the Proposed Rule
The objectives of the proposed rule are to:
Ensure that the System's capital requirements, including
certain regulatory disclosures, reflect the current expected credit
losses methodology, which revises the accounting for credit losses
under U.S. GAAP; and
Ensure that conforming amendments to other regulations
accurately reference credit losses.
B. Overview of Changes to U.S. Generally Accepted Accounting Principles
In June 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2016-13, Topic 326,
Financial Instruments--Credit Losses,\1\ which revises the accounting
for credit losses under U.S. GAAP. In pertinent part, ASU No. 2016-13:
---------------------------------------------------------------------------
\1\ ASU No. 2016-13 introduces ASC Topic 326, which covers
measurement of credit losses on financial instruments and includes
three subtopics: (i) Subtopic 10: Financial Instruments--Credit
Losses--Overall; (ii) Subtopic 20: Financial Instruments--Credit
Losses--Measured at Amortized Cost; and (iii) Subtopic 30: Financial
Instruments--Credit Losses--Available-for-Sale Debt Securities.
---------------------------------------------------------------------------
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;
Modifies the treatment of credit losses on available-for-
sale (AFS) debt securities; and
Requires certain disclosures of credit quality indicators
by year of origination (or vintage). The new accounting standard for
credit losses will apply to all System institutions.\2\
---------------------------------------------------------------------------
\2\ FCA regulation Sec. 628.2 defines System institution, for
capital rule purposes, as a System bank, an association, Farm Credit
Leasing Services Corporation, and any other FCA-chartered
institution that we determine should be subject to our capital
rules. FCA issued an Informational Memorandum on September 1, 2016,
New Accounting Standard on Financial Instruments--Credit Losses,
which provided initial information on CECL.
---------------------------------------------------------------------------
CECL differs from the incurred loss methodology in several key
respects. CECL requires System institutions to recognize lifetime
expected credit losses for financial assets measured at amortized cost,
not just those credit losses that have been incurred as of the
reporting date. CECL also requires the incorporation of reasonable and
supportable forecasts in developing an estimate of lifetime expected
credit losses, while maintaining the current requirement for System
institutions to 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.
Estimating expected credit losses over the life of an asset under CECL,
including consideration of reasonable and supportable forecasts,
results in earlier recognition of credit losses than under the existing
incurred loss methodology.
In addition, CECL replaces multiple impairment approaches in
existing U.S. GAAP. CECL allowances will cover a broader range of
financial assets than allowance for loan losses (ALL) under the
incurred loss methodology. Under the incurred loss methodology, in
general, ALL 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 a liability).\3\ These exposures will be within the scope
of CECL. In addition, CECL covers credit losses on held-to-maturity
(HTM) debt securities.
---------------------------------------------------------------------------
\3\ ``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. We note that credit
losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not recognized under
CECL.
---------------------------------------------------------------------------
As mentioned above, ASU No. 2016-13 also introduces PCD assets as a
replacement for PCI assets. The PCD asset definition covers a broader
range of assets than the PCI asset definition. CECL requires System
institutions to estimate and record credit loss allowances for a PCD
asset at the time of purchase. The credit loss allowance is then added
to the purchase price to determine the amortized cost basis of the
asset for financial reporting purposes. Post-acquisition increases in
credit loss allowances on PCD assets will be established through a
charge to earnings. This is different from the current treatment of PCI
assets, for which System institutions are not permitted to estimate and
recognize credit loss allowances at the time of purchase. Rather, in
general, credit loss allowances for PCI assets are estimated after the
purchase only if there is deterioration in the expected cash flows from
the assets.\4\
---------------------------------------------------------------------------
\4\ The System currently holds limited PCI assets, which have
generally been acquired through business combinations. We do not
believe the amount of PCD assets in the System after the adoption of
CECL will be materially different.
---------------------------------------------------------------------------
ASU No. 2016-13 also introduces new requirements for Available-For-
Sale (AFS) debt securities. The new accounting standard requires that a
System institution 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 System institution 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, the adjustment to credit loss allowances
would be recognized with offsetting entries to deferred tax assets
(DTAs), if appropriate, and to the fiscal year's beginning retained
earnings.
The effective date of ASU No. 2016-13 varies for different banking
organizations. For banking organizations that are public business
entities (PBE) but not SEC filers (as defined in U.S. GAAP),\5\ ASU No.
2016-13 will become effective for the first fiscal year beginning after
December 15, 2020, including interim periods within that fiscal year.
The Federal Farm Credit Banks Funding Corporation (Funding Corporation)
meets the definition of a
[[Page 49686]]
PBE,\6\ and it is our understanding that all System institutions will
implement the new standard for purposes of System-wide combined
financial statements for the quarter ending March 31, 2021.
---------------------------------------------------------------------------
\5\ A public business entity (PBE) that is not an SEC filer
includes: (1) An entity that has issued securities that are traded,
listed, or quoted on an over-the-counter market, or (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.
For further information on the definition of a PBE, refer to ASU No.
2013-12, Definition of a Public Business Entity, issued in December
2013.
\6\ The Funding Corporation is the fiscal agent and disclosure
agent for the System. The Funding Corporation is responsible for
issuing and marketing debt securities to finance the System's loans,
leases, and operations and for preparing and producing the System's
financial results.
---------------------------------------------------------------------------
C. Regulatory Capital
Changes necessitated by CECL to a System institution's retained
earnings, DTAs, and allowances will affect its regulatory capital
ratios.\7\ Specifically, retained earnings are a key component of a
System institution's common equity tier 1 (CET1) capital. An increase
in a System institution's allowances, including those estimated under
CECL, generally will reduce the institution's earnings or retained
earnings, and therefore its CET1 capital.\8\
---------------------------------------------------------------------------
\7\ These capital ratios are specified in FCA regulation Sec.
628.10.
\8\ However, allowances recognized on PCD assets upon adoption
of CECL and upon later purchases of PCD assets generally would not
reduce the System institution's earnings, retained earnings, or CET1
capital.
---------------------------------------------------------------------------
Depending on the nature of the difference, DTAs arising from
temporary differences (temporary difference DTAs) are included in a
System's institution's risk-weighted assets or are deducted from CET1
capital.\9\ Increases in allowances generally give rise to increases in
temporary difference DTAs that will partially offset the reduction in
earnings or retained earnings.\10\ Under Sec. 628.20(d)(3), the ALL is
included in a System institution's tier 2 capital up to 1.25 percent of
its standardized total risk-weighted assets not including any amount of
the ALL.\11\
---------------------------------------------------------------------------
\9\ DTAs arising from temporary differences in relation to net
operating loss carrybacks are risk-weighted at 100 percent under
Sec. 628.32(l)(3). DTAs that arise from net operating loss and tax
credit carryforwards, net of any related valuation allowances and
net of deferred tax liabilities in accordance with Sec. 628.22(e),
are deducted from CET1 capital under Sec. 628.22(a)(3). All other
DTAs are risk-weighted at 100 percent under Sec. 628.32(l)(5). DTAs
are immaterial at most System institutions.
\10\ See Accounting Standards Codification Topic 740, ``Income
Taxes.''
\11\ Under Sec. 628.2, any amount of ALL greater than the 1.25
percent limit is deducted from standardized total risk-weighted
assets.
---------------------------------------------------------------------------
II. Description of the Proposed Rule
To address the forthcoming implementation of changes to U.S. GAAP
resulting from the FASB's issuance of ASU No. 2016-13 and to improve
consistency between our capital rules and U.S. GAAP, we propose to
amend our capital rules to identify which credit loss allowances under
the new accounting standard are eligible for inclusion in a System
institution's regulatory capital.\12\ In particular, FCA is proposing
to add adjusted allowances for credit losses (AACL) as a newly defined
term in the capital rules. AACL would include credit loss allowances
related to financial assets, except for allowances for PCD assets and
AFS debt securities.\13\ AACL would be eligible for inclusion in a
System institution's tier 2 capital subject to the current limit for
including ALL in tier 2 capital under the capital rules.
---------------------------------------------------------------------------
\12\ Note that Sec. 621.3 requires institutions to prepare
financial statements in accordance with GAAP, except as otherwise
directed by statutory and regulatory requirements.
\13\ This exclusion of credit loss allowances on PCD assets and
AFS debt securities is what differentiates AACL from the term
allowance for credit losses (ACL), which is used by the FASB in ASU
2016-13 and which applies to both financial 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.
---------------------------------------------------------------------------
The proposal also would provide a separate capital treatment for
allowances associated with AFS debt securities and PCD assets that
would apply to System institutions upon adoption of ASU 2016-13; revise
regulatory disclosure requirements that would apply to System banks
following their adoption of CECL; \14\ and make conforming amendments
to the FCA's other regulations that refer to credit loss allowances to
reflect the implementation of ASU No. 2016-13.
---------------------------------------------------------------------------
\14\ Section 628.63 requires System banks to disclose items such
as capital structure, capital adequacy, credit risk, and credit risk
mitigation.
---------------------------------------------------------------------------
Our capital rules are similar to the standardized approach capital
rules that the Federal banking regulatory agencies (FBRAs) \15\ adopted
for the banking organizations they regulate, while taking into account
the cooperative structure and the organization of the System. The FBRAs
published a CECL rule in February 2019.\16\ Our proposal is very
similar to the FBRAs' rule.\17\
---------------------------------------------------------------------------
\15\ The FBRAs are the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, and
the Federal Deposit Insurance Corporation.
\16\ 84 FR 4222 (February 14, 2019).
\17\ FCA staff met with System representatives during the
development of this rule to seek their input on certain issues. The
questions discussed were similar to the questions asked in the
preamble to the FBRA's proposed CECL rule. (83 FR 22312, May 14,
2018). We considered this input in developing this proposal.
---------------------------------------------------------------------------
A. Proposed Revisions to the Capital Rules To Reflect the Change in
U.S. GAAP
1. Introduction of Adjusted Allowances for Credit Losses as a Newly
Defined Term
FCA is proposing to revise the capital rules to reflect the revised
accounting standard for credit losses under U.S. GAAP as it relates to
System institutions' calculation of regulatory capital ratios. Under
the proposal, the new capital term AACL, rather than ALL, would apply
to all System institutions. Consistent with the treatment of ALL under
FCA's capital rules, amounts of AACL would be eligible for inclusion in
an institution's tier 2 capital up to 1.25 percent of the institution's
standardized total risk-weighted assets not including any amount of the
AACL.
CECL allowances cover a broader range of financial assets than ALL
under the incurred loss methodology. Under the capital rules, ALL
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 and the amount expected to be collected on the
financial assets (i.e., lifetime credit losses). Thus, AACL would
include allowances for expected credit losses on HTM debt securities
and lessors' net investments in leases that have been established to
reduce these assets to amounts expected to be collected, as determined
in accordance with U.S. GAAP. AACL also would include 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 would not be included in the definition of
AACL.
2. Definition of Carrying Value
FCA is proposing to revise the regulatory definition of carrying
value under the capital rules to provide that, for all assets other
than AFS debt securities and PCD assets, the carrying value is not
reduced by any associated credit loss allowance.
i. Available-for-Sale Debt Securities
Current accounting standards require a System institution to make
an individual assessment of each of its AFS
[[Page 49687]]
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
also results in a reduction in the same amount of the carrying value of
the AFS debt security. ASU No. 2016-13 revises the accounting for
credit impairment of AFS debt securities by requiring System
institutions 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 proposal,
all credit losses recognized on AFS debt securities would flow through
to 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 would
not be eligible for inclusion in a System institution's tier 2 capital.
ii. Purchased Credit Deteriorated Assets
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 System institution 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 System institution's balance sheet will not be
established through a charge to earnings. Post-acquisition increases in
allowances for PCD assets will be established through a charge against
earnings.
Including in tier 2 capital allowances that have not been charged
against earnings would diminish the quality of regulatory capital.
Accordingly, FCA is proposing to maintain the requirement that
valuation allowances be charged against earnings in order to be
eligible for inclusion in tier 2 capital. FCA is also 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.
As in the FBRAs' final rule, FCA is not proposing to allow System
institutions to bifurcate PCD allowances to include post-acquisition
allowances in the definition of AACL; we are concerned that a
bifurcated approach could create undue complexity and burden for System
institutions when determining the amount of credit loss allowances for
PCD assets eligible for inclusion in tier 2 capital. In addition,
System institutions have very little, if any, allowances for PCI assets
and, as discussed above, this will not change with the change to PCD
assets. Therefore, the proposal excludes all PCD allowances from being
included in tier 2 capital.\18\ The proposal also revises the
definition of carrying value such that for PCD assets the carrying
value is calculated net of allowances. This treatment of PCD assets
would, in effect, reduce a System institution's standardized total
risk-weighted assets, similar to the proposed treatment for credit loss
allowances for AFS debt securities.
---------------------------------------------------------------------------
\18\ This proposal excludes both initial PCD allowances and
post-acquisition PCD allowances from being included in tier 2
capital. As noted above, the initial allowance for a PCD asset will
not be established through a charge to earnings (the allowance is
estimated on the date of acquisition). However, post-acquisition
increases in allowances for PCD assets are established through a
charge against earnings.
---------------------------------------------------------------------------
3. Additional Considerations
As in the FBRAs' final rule, FCA is not proposing to change the
limit of 1.25 percent of risk-weighted assets governing the amount of
AACL eligible for inclusion in tier 2 capital. Should this limit be
finalized as proposed, FCA intends to monitor the effects of this limit
on regulatory capital and System institution lending practices. This
ongoing monitoring will include the review of data, including data
provided by System institutions, and will assist FCA in determining
whether a further change to the capital rules' treatment of AACL might
be warranted. To the extent FCA determines that further revisions to
the capital rules are necessary, we would seek comment through a
separate proposal.
In addition, unlike the FBRAs, FCA is not proposing a phase-in of
the day-one effects of CECL on regulatory capital ratios. The FBRAs
included an optional three-year transition period for banking
organizations to reduce the potential day-one adverse effects that CECL
may have on a banking organization's regulatory capital ratios. The
FBRAs included this transition period because of concerns that some
banking organizations might face difficulties in capital planning
because of uncertainty about the economic environment at the time of
CECL adoption.\19\
---------------------------------------------------------------------------
\19\ CECL requires consideration of current and future expected
economic conditions to estimate allowances. To an extent, these
conditions will not be known until closer to an institution's CECL
adoption date.
---------------------------------------------------------------------------
The FBRAs will use a banking organization's regulatory capital
ratios, as adjusted by the transition provision, to determine whether
the organization is in compliance with its regulatory capital
requirements (including capital buffer and prompt corrective action
(PCA) requirements). However, the FBRAs will continue to examine
banking organizations' credit loss estimates and allowance balances
through the supervisory process regardless of whether they have elected
to use the transition provision. In addition, the FBRAs may examine
whether banking organizations will have adequate amounts of capital at
the expiration of the transition provision period.\20\
---------------------------------------------------------------------------
\20\ 84 FR 4229 (February 14, 2019).
---------------------------------------------------------------------------
We are not proposing a transition period for the following reasons.
First, a transition provision appears to be unnecessary for any
System institution because, even without a transition period, they are
all expected to be sufficiently capitalized to absorb the day one
impact of CECL for the purpose of complying with regulatory capital
requirements. In particular, if the allowances as estimated under CECL
increase, CET1 capital (including retained earnings) will decrease and
tier 2 capital will increase; \21\ we believe total capital will be
largely unchanged at the majority of System institutions. Even though a
transition period like the FBRAs adopted would not affect the FCA's
supervisory oversight, we do not anticipate the impacts of CECL
prompting any increase in supervisory concern or response. Moreover,
the capital ratios of all System institutions--CET1; Tier 1; Total
Capital; and Tier 1 Leverage--are expected to remain above the
regulatory minimums and buffers after the implementation of CECL, even
without a transition period. An institution's ability to provide loans
and related services without a transition provision would be hindered
only if the
[[Page 49688]]
institution's capital measures would fall below its regulatory capital
requirements without the transition provision.\22\
---------------------------------------------------------------------------
\21\ As of March 31, 2019, the combined System-wide allowance
for loan losses and reserve for losses on unfunded commitments as a
percentage of risk weighted assets was 0.57 percent. As mentioned
above, under revised Sec. 628.20(d)(3), the AACL would be included
in a System institution's tier 2 capital up to 1.25 percent of its
standardized total risk-weighted assets not including any amount of
the AACL.
\22\ Unlike the banking organizations regulated by the FBRAs,
System institutions have no PCA requirements and therefore have no
concerns about triggering such requirements.
---------------------------------------------------------------------------
Second, we believe either an optional or a mandatory transition
period would lead to unnecessary complexity and operational burden that
is not warranted in light of our belief that a transition period is not
needed. An optional transition period, like that adopted by the FBRAs,
could be difficult to implement and maintain for System institutions in
at least two districts that make use of common standardized
applications for computing and reporting regulatory capital. A
transition period utilized by some institutions in such districts but
not by others would appear to complicate supporting the common
reporting platforms for those institutions. In addition, allowing an
optional transition period would create a lack of comparability among
System institutions' capital levels.
A mandatory transition period might not be wanted by institutions
that already have plans to absorb the day-one impact of CECL and have
incurred sunk costs in making changes to processes for calculating and
reporting regulatory capital ratios for FCA Uniform Reports of
Financial Condition and Performance (Call Reports) and shareholder
reporting.
Closer to the adoption of CECL, and in the unlikely event that its
day-one impact threatens regulatory capital compliance or patronage
practices, FCA may consider other options to reduce unanticipated
impacts of the accounting change. The type of action would depend on
the materiality of CECL's impact and how widespread the issue is
throughout the System.
We request comment on the following issues relative to a transition
period:
1. We invite comment on whether FCA should adopt a transition
period for the day-one impact CECL may have on an institution's
regulatory capital ratios. If you believe we should adopt a transition
period, please explain whether you believe it should be mandatory or
optional, and please address the reasons we have discussed for not
proposing a transition period. Please provide analysis to support your
position.
2. We invite comment on alternatives to a transition period that
might accommodate institutions in their implementation of the CECL
requirements. Please explain what these alternatives are and why they
would be necessary. Please explain why our reasons for not proposing a
transition period would not apply to these alternatives. Please provide
analysis to support your position.
B. Disclosures and Regulatory Reporting
Under the proposed rule, System banks would be required to update
their disclosures required under Sec. 628.63 to reflect the adoption
of CECL. For example, System banks would be required to disclose AACL
instead of ALL after adoption.
In addition, to reflect changes in U.S. GAAP, FCA anticipates
revising the Call Reports as part of its annual review process. These
revisions would specify the affected line items in the capital
schedules and the newly defined term AACL. In addition, FCA intends to
update instructions for all affected Call Report schedule references to
ALL. If we adopt this rule as proposed, we expect to make these changes
for the March 31, 2021 reporting period.
C. Conforming Changes
A number of existing FCA regulations outside of Part 628 refer to
ALL or to ``loan loss.'' ASU No. 2016-13 removes impairment approaches
and related terminology, including replacing the term ALL with
allowance for credit losses (ACL). The proposed rule would replace the
references to ALL or ``loan loss'' in our regulations with references
to ACL or ``credit loss,'' as appropriate. In addition, several
regulations that refer to ``allowance for losses'' more appropriately
should refer to ACL.
Both the part 620 regulations governing the contents of the annual
report to shareholders and the part 630 regulations governing the
contents of the annual report to investors require that the discussion
and analysis of risk exposures analyze the allowance for loan losses.
The proposal would amend the analysis requirement for consistency with
ASU No. 2016-13, which requires an analysis of the allowance for credit
losses by year of origination (vintage year) and the allowance be
supported by reasonable and supportable forecasts. The proposal would
also replace terms in the requirement that references ``loan loss''
with references to ``credit loss,'' as appropriate.
In the capital rules codified at part 628, as well as in other
regulations that refer to the capital rules, the proposal would replace
references to ALL with AACL. In the capital disclosures at Sec.
628.63, references to ``probable loan losses'' and ``loan losses''
would be updated with ACL or AACL, as applicable.
The proposed rule would make conforming changes in regulations in
the following parts:
Part 611--Organization
Part 615--Funding and Fiscal Affairs, Loan Policies and
Operations, and Funding Operations
Part 620--Disclosure to Shareholders
Part 621--Accounting and Reporting Requirements
Part 628--Capital Adequacy of System Institutions
Part 630--Disclosure to Investors in System-Wide and
Consolidated Bank Debt Obligations of the Farm Credit System.
D. Supervisory Guidance on the ACL
If this rule is adopted, we expect to issue supervisory guidance on
the ACL. Until that time, many concepts, processes, and practices
detailed in existing supervisory guidance on the ALL would continue to
remain relevant under CECL. Relevant guidance includes, but is not
limited to, information related to management's responsibility for the
allowance estimation process, the board of directors' responsibility
for overseeing management's process, and the need for institutions to
appropriately support and document their allowance estimates.\23\ Until
new guidance is issued, institutions should consider the relevant
sections of existing ALL guidance in their implementation of the new
accounting standard.
---------------------------------------------------------------------------
\23\ Existing supervisory guidance includes: FCA Bookletter 49,
Adequacy of Farm Credit System Institutions' Allowance for Loan
Losses and Risk Funds, April 26, 2004; FCA Informational Memorandum,
Computer-Based Model Validation Expectations, June 17, 2002; FCA
Informational Memorandum, Allowance for Loan Losses, June 30, 2009;
and FCA Exam Manual, Allowance for Loan Losses, November 17, 2015.
---------------------------------------------------------------------------
E. Additional Request for Comment
FCA seeks comment on all aspects of the proposal. Comments are
requested about the potential impact, if any, of the proposal in
ensuring the safety and soundness of individual System institutions as
well as on the stability of the Farm Credit System.
III. Timeframe for Implementation
We intend the effective date of the final rule to be January 1,
2021. As mentioned above, the effective date of ASU No. 2016-13 will
become effective for the Funding Corporation for the first fiscal year
beginning after December 15, 2020, including interim periods within
that fiscal year, and System institutions will implement the new
standard for purposes of System-wide combined financial statements for
the Call Report quarter ending March 21, 2021.
[[Page 49689]]
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with its
affiliated associations, has assets and annual income in excess of the
amounts that would qualify them as small entities. Therefore, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.
Lists of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 621
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 628
Accounting, Agriculture, Banks, banking, Capital, Government
securities, Investments, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.
For the reasons stated in the preamble, the Farm Credit
Administration proposes to amend parts 611, 615, 620, 621, 628, and 630
of chapter VI, title 12 of the Code of Federal Regulations as follows:
PART 611--ORGANIZATION
0
1. The authority citation for part 611 is revised to read as follows:
Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2,
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 4.3A, 4.12,
4.12A, 4.15, 4.20, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25, 7.0-
7.3, 7.6-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011,
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121,
2122, 2123, 2124, 2128, 2129, 2130, 2154a, 2183, 2184, 2203, 2208,
2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279a-3, 2279b-
2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101
Stat. 1568, 1638 (12 U.S.C. 2071 note and Sec. 2202 note).
Sec. 611.515 [Amended]
0
2. Amend Sec. 611.515 paragraph (b)(6)(ii)(E) by removing the word
``loan'' and adding in its place the word ``credit''.
Sec. 611.1122 [Amended]
0
3. Amend Sec. 611.1122 by:
0
a. Removing in paragraph (e)(6)(iii), the word ``loan'' and adding in
its place the word ``credit''; and
0
b. Removing in paragraph (e)(10), the words ``loan losses'' and adding
in its place the words ``credit losses'' both places it appears.
Sec. 611.1130 [Amended]
0
4. Amend Sec. 611.1130 paragraph (b)(4)(i) by removing the words
``allowance for losses'' and adding in its place the words ``allowance
for credit losses''.
Sec. 611.1223 [Amended]
0
5. Amend Sec. 611.1223 paragraph (c)(23)(ii) by removing the words
``allowance for losses'' and adding in its place the words ``allowance
for credit losses''.
Sec. 611.1250 [Amended]
0
6. Amend Sec. 611.1250 paragraph (b)(5)(i)(B) by removing the words
``loan'' and adding in its place the words ``credit''.
Sec. 611.1255 [Amended]
0
7. Amend Sec. 611.1255 paragraph (b)(5)(i)(B) by removing the words
``general allowance for losses'' and adding in its place the words
``general allowance for credit losses''.
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
0
8. The authority citation for part 615 is revised to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4,
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C.
2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15
U.S.C. 78o-7 note).
Sec. 615.5050 [Amended]
0
9. Amend Sec. 615.5050 by:
0
a. Removing in paragraph (c)(1), the words ``allowance for loan
losses'' and adding in its place the words ``allowance for credit
losses''; and
0
b. Removing in paragraphs (c)(2) through (4) the words ``allowance for
losses'' and adding in its place the words ``allowance for credit
losses''.
Sec. 615.5132 [Amended]
0
10. Amend Sec. 615.5132 paragraph (a) by removing the words ``loan
loss adjustments'' and adding in its place the words ``credit loss
adjustments''.
Sec. 615.5140 [Amended]
0
11. Amend Sec. 615.5140 paragraph (b)(4)(ii) by removing the words
``loan loss'' and adding in its place the words ``credit loss''.
Sec. 615.5200 [Amended]
0
12. Amend Sec. 615.5200 paragraph (c)(4) by adding the word ``credit''
before ``losses''.
Sec. 615.5201 [Amended]
0
13. Amend Sec. 615.5201 by removing the words ``allowance for loan
losses'' and adding in its place the words ``adjusted allowance for
credit losses'' in the definition of ``Risk-adjusted asset base''.
Sec. 615.5351 [Amended]
0
14. Amend Sec. 615.5351 paragraph (d) by adding the word ``credit''
before ``loss.''
PART 620--DISCLOSURE TO SHAREHOLDERS
0
15. The authority citation for part 620 continues to read as follows:
Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254).
Sec. 620.5 [Amended]
0
16. Amend Sec. 620.5 by:
0
a. Removing in paragraph (f)(1)(i)(D), the words ``Allowance for
losses'' and adding in its place the words ``Allowance for credit
losses'';
0
b. Removing in paragraph (f)(1)(ii)(B), the words ``Provision for loan
losses'' and adding in its place the words ``Provision for credit
losses'';
0
c. Removing in paragraph (f)(1)(iii)(F), the words ``Allowance for loan
losses-to-loans'' and adding in its place the words ``Allowance for
credit losses-to-loans'';
0
d. Revising paragraph (g)(1)(iv)(B);
0
e. Removing in paragraph (g)(1)(iv)(E), the words ``allowance for
losses'' and adding in its place the words ``allowance for credit
losses.''
The revision reads as follows:
* * *
(g) * * *
(1) * * *
[[Page 49690]]
(iv) * * *
(B) An analysis of the allowance for credit losses by year of
origination (vintage year). The number of years analyzed must be
consistent with vintage year disclosures required by generally accepted
accounting principles. The analysis must include the ratios of the
allowance for credit losses to loans and net chargeoffs to average
loans and a discussion of the adequacy of the allowance for credit
losses given reasonable and supportable forecasts;
* * * * *
PART 621--ACCOUNTING AND REPORTING REQUIREMENTS
0
17. The authority citation for part 621 is revised to read as follows:
Authority: Secs. 5.17, 5.19, 5.22A, 8.11 of the Farm Credit Act
(12 U.S.C. 2252, 2257a, 2279aa-11).
Sec. 621.5 [Amended]
0
18. Amend Sec. 621.5 by:
0
a. Removing in the heading, the word ``loan'' and adding in its place
the word ``credit''; and
0
b. Removing in paragraphs (a) and (b), the word ``loan'' and adding in
its place the word ``credit''.
Sec. 621.8 [Amended]
0
19. Amend Sec. 621.8 paragraph (c)(2) by removing the word ``loan''
and adding in its place the word ``credit''.
PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS
0
20. The authority citation for part 628 is revised to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4,
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C.
1254 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15
U.S.C. 78o-7 note).
Sec. 628.2 [Amended]
0
21. Amend Sec. 628.2 by:
0
a. Adding in alphabetical order a definition for ``Adjusted allowances
for credit loss (AACL)'';
0
b. Removing the definition of ``Allowances for loan losses (ALL)''; and
0
c. Adding in the definition ``Carrying value'' a new last sentence;
0
d. Revising ``Standardized total risk-weighted assets'' definitions
second paragraph (2).
The additions and revision reads as follows:
Sec. 628.2 Definitions
* * * * *
Adjusted allowances for credit losses (AACL) means 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
includes 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 excludes
allowances created that reflect credit losses on purchased credit
deteriorated assets and available-for-sale debt securities.
* * * * *
Carrying value * * * 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.
* * * * *
Standardized total risk-weighted assets means:
* * *
(2) Any amount of the System institution's adjusted allowance for
credit losses that is not included in tier 2 capital.
* * * * *
Sec. 628.20 [Amended]
0
22. Amend Sec. 628.20 paragraph (d)(3) by removing the word ``ALL''
and adding in its place the word ``AACL'' each place it appears.
Sec. 628.22 [Amended]
0
23. Amend Sec. 628.22 paragraph (c) by removing the word ``ALL'' in
footnote 6 and adding in its place the word ``AACL''.
Sec. 628.63 [Amended]
0
24. Amend Table 5 to Section 628.63--Credit Risk: General Disclosures
by:
0
a. Removing in paragraphs (a)(5), (e)(5), and (g), the words
``allowance for loan losses'' and adding in its place the words
``adjusted allowance for credit losses''; and
0
b. Removing in footnote 6, the words ``probable loan losses'' and
adding in its place the words ``credit losses''.
PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
0
25. The authority citation for part 630 is revised to read as follows:
Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254).
Sec. 630.20 [Amended]
0
26. Amend Sec. 630.20 by:
0
a. Removing in paragraph (f)(1)(ii), the words ``Allowance for losses''
and adding in its place the words ``Allowance for credit losses'';
0
b. Removing in paragraph (f)(2)(iii), the words ``Provision for loan
losses'' and adding in its place the words ``Provision for credit
losses'';
0
c. Removing in paragraph (f)(3)(v), the words ``Allowance for losses''
and adding in its place the words ``Allowance for credit losses'' and
0
d. Revising paragraph (g)(1)(ii)(B).
The revision reads as follows:
* * *
(B) An analysis of the allowance for credit losses by year of
origination (vintage year). The number of years analyzed must be
consistent with vintage year disclosures required by generally accepted
accounting principles. The analysis must include the ratios of the
allowance for loan credit losses to loans and net chargeoffs to average
loans and a discussion of the adequacy of the allowance for credit
losses given reasonable and supportable forecasts.
* * * * *
Appendix A to Part 630--Supplemental Information Disclosure Guidelines
[Amended]
0
27. Amend Appendix A to Part 630 by removing the words ``loan losses''
and adding in its place the words ``credit losses'' in Table B wherever
they appear.
Dated: August 14, 2019.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2019-19916 Filed 9-20-19; 8:45 am]
BILLING CODE 6705-01-P