Citing potential high volatility in credit loss allowances under the Current Expected Credit Loss accounting standard, the American Bankers Association recently called on the Basel Committee for Banking Supervision to allow banks a minimum of five years to phase into regulatory capital the incremental allowances for credit losses under the CECL standard at the time of initial implementation. The Basel Committee had proposed a three-year transition period for the additional allowances.
In a separate letter to the Basel Committee, ABA also recommended a comprehensive and open process in reevaluating the risk-weighting process in light of the CECL accounting standard. With CECL becoming effective in 2020 for SEC registrants and 2021 for all other institutions, the committee is contemplating various long-term options in modifying how credit loss provisions are treated for regulatory capital requirements. Existing significant global differences in loan loss provisioning and charge-off practices give certain banks advantages in calculating regulatory capital, and these advantages will likely increase as banks adopt “expected credit loss” accounting standards. Most non-U.S. banks will adopt International Financial Reporting Standard 9, a standard that (unlike CECL) does not require lifetime credit losses to be recorded at origination. At stake is also the possible discontinuance of including credit loss allowances within Tier 2 capital.
In addition to advocating for the “add-back” of the credit loss allowance into Tier 2 capital, ABA recommended that the Committee explore options that could best “level the playing field” between banks internationally and of different sizes. Included is the recommendation to explore risk-weighting based on amounts net of the related allowances and charge-offs. Whatever the direction the committee takes, ABA also advocated for transparency to the process of determining and calibrating the risk-weights. For more information, contact ABA’s Mike Gullette or Hugh Carney.