The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (collectively, the agencies) are seeking comment on a joint proposal that would amend the agencies’ capital rules (capital rule) to reflect the upcoming adoption by banking organizations of the current expected credit loss methodology (CECL) contained in the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13, Topic 326, Financial Instruments Credit Losses. Specifically, the proposal would, upon the adoption of CECL, replace the definition of allowance for loan and lease losses with a new allowance definition that reflects allowances for all  financial assets that will be subject to CECL.  The proposal would also include in the capital rule an optional three-year transition provision to mitigate the potential initial impact on regulatory capital upon CECL adoption.  In addition, for certain banking organizations that are subject to additional disclosure requirements, the proposed rule would make conforming changes to banking organizations’ required disclosures under the capital rule, including regulatory capital ratios, total risk-weighted assets reconciliation of regulatory capital elements as they relate to audited financial statements.  In conjunction with the adoption of ASC Topic 326, the Financial Accounting Standards Board also provides a new credit loss methodology for available-for-sale (AFS) debt securities.  The proposed rule would update the treatment of AFS debt securities under the capital rule to reflect this new credit loss methodology.  

The proposal would also make conforming changes to other Board regulations, including Regulation H, Regulation K, Regulation O, Regulation Y, and Regulation YY, to reflect the upcoming adoption by banking organizations of CECL.