Agencies Finalize Three-Year Phase-In for CECL’s Regulatory Capital Effects

As expected, the financial regulatory agencies today issued a final rule giving banks the option to phase in over a three-year period the day-one adverse effects of the Current Expected Credit Loss standard on regulatory capital. The CECL standard, which goes into effect in 2020 for SEC registrants, 2021 for non-SEC banks that are FASB-defined “public business entities,” and 2022 for all other banks, requires an estimate of expected credit losses over the life of the portfolio to be effectively recorded upon origination.

In related news, the Federal Reserve issued a statement noting that to reduce uncertainty, it will maintain its current framework for calculating loan loss allowances in supervisory stress tests until after the 2021 test cycle. With regard to company-run stress tests, the Fed said that it would “not issue supervisory findings on firms’ stressed estimation of the allowance under CECL in CCAR’s qualitative assessment any earlier than 2022.”