Banking and Finance Law Daily FDIC final rule addresses CECL effects on deposit insurance assessments
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Wednesday, February 17, 2021

FDIC final rule addresses CECL effects on deposit insurance assessments

By John M. Pachkowski, J.D.

The FDIC has adopted a final rule to address the temporary deposit insurance assessment effects resulting from certain optional transition provisions relating to the implementation of CECL methodology.

The Board of Directors of the Federal Deposit Insurance Corporation has adopted a final rule that amends the risk-based deposit insurance assessment system applicable to all large insured depository institutions (IDIs), including highly complex IDIs.

The final rule is intended to address the temporary deposit insurance assessment effects resulting from certain optional regulatory capital transition provisions relating to the implementation of the current expected credit losses (CECL) methodology. The final rule also is intended to ensure that a deposit insurance assessment rate for a large or highly complex bank accurately reflects the bank’s risk to the Deposit Insurance Fund.

CECL methodology. Under the CECL methodology, banking organizations are required to recognize lifetime expected credit losses and to incorporate reasonable and supportable forecasts in developing the estimate of lifetime expected credit losses, while also maintaining the current requirement that banking organizations consider past events and current conditions. The FDIC, along with the Office of the Comptroller of the Currency and Federal Reserve Board issued a final rule in 2019 that allowed banking organizations to phase in over a three-year period the day-one adverse effects of CECL on their regulatory capital ratios. The banking agencies further amended the CECL phase-in period due to the economic effects of the COVID-19 pandemic.

Double counting. Specifically, the final rule will remove the double counting of a specified portion of the CECL transitional amount or the modified CECL transitional amount in certain financial measures that are calculated using the sum of Tier 1 capital and reserves and that are used to determine assessment rates for large or highly complex IDIs. The final rule also adjusts the calculation of the loss severity measure to remove the double counting of a specified portion of the CECL transitional amounts for a large or highly complex IDI.

memorandum prepared by the FDIC’s staff noted that the final rule does not affect regulatory capital or the regulatory capital relief provided in the form of transition provisions that allow banking organizations to phase in the effects of CECL on their regulatory capital ratios.

The final rule takes effect on April 1, 2021. This will enable the FDIC to ensure that the temporary effects of the double counting of the applicable portions of the CECL transitional amounts in select financial measures used in the scorecard approach for determining assessment rates for a large or highly complex IDI are corrected, beginning with the second quarterly assessment period of 2021.

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