Banking and Finance Law Daily Agencies clarify interaction of the CECL revised transition and CARES Act relief
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Tuesday, March 31, 2020

Agencies clarify interaction of the CECL revised transition and CARES Act relief

By John M. Pachkowski, J.D.

The OCC, Fed and FDIC have issued a joint statement clarifying interaction of their CECL revised transition and the statutory relief afforded under the CARES Act.

In light of recent regulatory and legislative action surrounding the impact on regulatory capital stemming from the implementation of Accounting Standards Update No. 2016-13, "Financial Instruments—Credit Losses," Topic 326, "Measurement of Credit Losses on Financial Instruments," commonly referred to as CECL, the Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corporation have issued a joint statement clarifying the interaction between the regulatory and legislative action for purposes of regulatory capital requirements.

CECL IFR. On March 27, 2020, the agencies issued an interim final rule—CECL IFR—that delays the estimated impact on regulatory capital stemming from the implementation of CECL. Specifically, the CECL IFR provided banking organizations that are required, as of Jan. 1, 2020, to adopt CECL for accounting purposes under U.S. generally accepted accounting principles (U.S. GAAP) during 2020 an option to delay an estimate of CECL’s impact on regulatory capital (see Banking and Finance Law Daily, March 27, 2020).

In a nutshell, the CECL IFR gradually phases in the full effect of CECL on regulatory capital, providing a five-year transition period to allow banking organizations to better focus on supporting lending to creditworthy households and businesses due to recent disruptions in economic conditions caused by COVID-19.

CARES Act relief. Also on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act provides banking organizations with optional, temporary relief from complying with CECL. The CARES Act’s optional, temporary relief ends on the earlier of the termination date of the current national emergency, declared by the President on March 13, 2020, under the National Emergencies Act concerning the COVID-19 outbreak, or Dec. 31, 2020.

Under the agencies’ joint statement, no banking organization is required to comply with CECL during the statutory relief period in the CARES Act, including banking organizations that otherwise would be required to adopt CECL in 2020 under U.S. GAAP. These banking organizations may delay compliance with CECL until the statutory relief period expires.

In addition, banking organizations that elect to use the CARES Act’s relief may also elect the regulatory capital relief provided under the CECL IFR after the expiration of the statutory relief period.

If a banking organization chooses to apply CECL pursuant to U.S. GAAP in 2020, it may elect to obtain the full benefit from the regulatory capital relief provided under the CECL IFR, that is, the five-year transition period.

Transition period commences. The joint statement also noted that the five-year transition period under the CECL IFR begins on the date it would have been required to adopt CECL under U.S. GAAP, regardless of whether the banking organization uses the CARES Act’s relief. For a banking organization that uses the CARES Act’s relief, and subsequently opts to use the relief provided in the CECL IFR, the initial two-year transition period would be reduced by the number of quarters during which the banking organization uses the statutory relief.

Finally, the joint statement provides different scenarios of how the CARES Act and the CECL IFR interact based on the CARES Act relief period remaining in effect through Dec. 31, 2020.

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