ABA Warns of Unintended Consequences of Proposed CECL Capital Phase-In Delay

In a comment letter to the financial regulatory agencies today, ABA warned of potential unintended consequences that could arise as a result of a recent interim final rule delaying the three-year phase-in of the regulatory capital effects of the CECL standard for two years.

In addition to the delay, the IFR also adds back 25% of the difference between the “day one” CECL allowance (the balance recorded on the effective date) and the end-of-period CECL allowance into regulatory capital for the two-year period preceding the phase-in. This multiplier was largely based on the median after-tax incremental allowances that larger banks had announced in public disclosures prior to CECL’s effective date.

However, ABA noted that by relying on these projections (which were based on forecasts of a “benign” economy) and not adjusting for the extreme volatility seen  in recent days, “CECL implementation will adversely affect the availability of credit to consumer borrowers—particularly lower and moderate income borrowers and especially during economic downturns—to the benefit of commercial borrowers.”

ABA urged the agencies to use the congressionally mandated CECL study that was included in the 2019 appropriations bill “as a basis to assess the appropriateness of the across-the-board 25% scaling multiplier within the five-year transition period.” ABA also urged them to consider a 100% add-back of incremental CECL allowances into common equity tier 1 regulatory capital for the duration of the transition period.