Implementation of the Current Expected Credit Losses Methodology for Allowances, Related Adjustments to the Tier 1/Tier 2 Capital Rule, and Conforming Amendments
| Published date | 23 September 2019 |
| Citation | 84 FR 49684 |
| Record Number | 2019-19916 |
| Section | Proposed rules |
| Court | Farm Credit Administration |
Federal Register, Volume 84 Issue 184 (Monday, September 23, 2019)
[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Proposed Rules]
[Pages 49684-49690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19916]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 615, 620, 621, 628 and 630
RIN 3052-AD36
Implementation of the Current Expected Credit Losses Methodology
for Allowances, Related Adjustments to the Tier 1/Tier 2 Capital Rule,
and Conforming Amendments
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA, we, or our) is inviting
public comment on a proposal to address changes to our capital and
other regulations, including certain regulatory disclosure
requirements, in response to recent changes in the U.S. generally
accepted accounting principles (U.S. GAAP).
DATES: You may send us comments on or before November 22, 2019.
ADDRESSES: For accuracy and efficiency reasons, please submit comments
by email or through the FCA's website. We do not accept comments
submitted by facsimile (fax), as faxes are difficult for us to process
in compliance with section 508 of the Rehabilitation Act. Please do not
submit your comment multiple times via different methods. You may
submit comments by any of the following methods:
Email: Send us an email at [email protected].
FCA Website: http://www.fca.gov. Click inside the ``I want
to . . .'' field near the top of the page; select ``comment on a
pending regulation'' from the dropdown menu; and click ``Go.''
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Barry F. Mardock, Acting Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia, or on our website at http://www.fca.gov. We will show
your comments as submitted, but for technical reasons we may omit items
such as logos and special characters. Identifying information that you
provide, such as phone numbers and addresses, will be publicly
available. However, we will attempt to remove email addresses to help
reduce internet spam.
To read comments online, go to www.fca.gov, click inside the ``I
want to . . .'' field near the top of the page; select ``find comments
on a pending regulation'' from the dropdown menu; and click ``Go.''
This will take you to the Comment Letters page where you can select the
regulation for which you would like to read the public comments.
FOR FURTHER INFORMATION CONTACT:
Ryan Leist, Senior Accountant, Office of Regulatory Policy, (703) 883-
4223, TTY (703) 883-4056; or
Jeremy R. Edelstein, Associate Director, Finance and Capital Markets
Team, Office of Regulatory Policy, (703) 883-4497, TTY (703) 883-4056;
or
Jennifer Cohn, Senior Counsel, Office of General Counsel, (720) 213-
0440, TTY (703) 883-4056.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Objectives of the Proposed Rule
B. Overview of Changes to U.S. Generally Accepted Accounting
Principles
C. Regulatory Capital
II. Description of the Proposed Rule
A. Proposed Revisions to the Capital Rules To Reflect the Change
in U.S. GAAP
1. Introduction of Adjusted Allowances for Credit Losses as a
Newly Defined Term
2. Definition of Carrying Value
i. Available-for-Sale Debt Securities
ii. Purchased Credit Deteriorated Assets
3. Additional Considerations
B. Disclosures and Regulatory Reporting
[[Page 49685]]
C. Conforming Changes
D. Supervisory Guidance on the ACL
E. Additional Request for Comment
III. Timeframe for Implementation
IV. Regulatory Flexibility Act
I. Introduction
A. Objectives of the Proposed Rule
The objectives of the proposed rule are to:
Ensure that the System's capital requirements, including
certain regulatory disclosures, reflect the current expected credit
losses methodology, which revises the accounting for credit losses
under U.S. GAAP; and
Ensure that conforming amendments to other regulations
accurately reference credit losses.
B. Overview of Changes to U.S. Generally Accepted Accounting Principles
In June 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2016-13, Topic 326,
Financial Instruments--Credit Losses,\1\ which revises the accounting
for credit losses under U.S. GAAP. In pertinent part, ASU No. 2016-13:
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\1\ ASU No. 2016-13 introduces ASC Topic 326, which covers
measurement of credit losses on financial instruments and includes
three subtopics: (i) Subtopic 10: Financial Instruments--Credit
Losses--Overall; (ii) Subtopic 20: Financial Instruments--Credit
Losses--Measured at Amortized Cost; and (iii) Subtopic 30: Financial
Instruments--Credit Losses--Available-for-Sale Debt Securities.
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Introduces the current expected credit losses methodology
(CECL), which replaces the incurred loss methodology for financial
assets measured at amortized cost;
Introduces the term purchased credit deteriorated (PCD)
assets, which replaces the term purchased credit impaired (PCI) assets;
Modifies the treatment of credit losses on available-for-
sale (AFS) debt securities; and
Requires certain disclosures of credit quality indicators
by year of origination (or vintage). The new accounting standard for
credit losses will apply to all System institutions.\2\
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\2\ FCA regulation Sec. 628.2 defines System institution, for
capital rule purposes, as a System bank, an association, Farm Credit
Leasing Services Corporation, and any other FCA-chartered
institution that we determine should be subject to our capital
rules. FCA issued an Informational Memorandum on September 1, 2016,
New Accounting Standard on Financial Instruments--Credit Losses,
which provided initial information on CECL.
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CECL differs from the incurred loss methodology in several key
respects. CECL requires System institutions to recognize lifetime
expected credit losses for financial assets measured at amortized cost,
not just those credit losses that have been incurred as of the
reporting date. CECL also requires the incorporation of reasonable and
supportable forecasts in developing an estimate of lifetime expected
credit losses, while maintaining the current requirement for System
institutions to consider past events and current conditions.
Furthermore, the probable threshold for recognition of allowances in
accordance with the incurred loss methodology is removed under CECL.
Estimating expected credit losses over the life of an asset under CECL,
including consideration of reasonable and supportable forecasts,
results in earlier recognition of credit losses than under the existing
incurred loss methodology.
In addition, CECL replaces multiple impairment approaches in
existing U.S. GAAP. CECL allowances will cover a broader range of
financial assets than allowance for loan losses (ALL) under the
incurred loss methodology. Under the incurred loss methodology, in
general, ALL covers credit losses on loans held for investment and
lease financing receivables, with additional allowances for certain
other extensions of credit and allowances for credit losses on certain
off-balance sheet credit exposures (with the latter allowances
presented as a liability).\3\ These exposures will be within the scope
of CECL. In addition, CECL covers credit losses on held-to-maturity
(HTM) debt securities.
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\3\ ``Other extensions of credit'' includes trade and
reinsurance receivables, and receivables that relate to repurchase
agreements and securities lending agreements. ``Off-balance sheet
credit exposures'' includes off-balance sheet credit exposures not
accounted for as insurance, such as loan commitments, standby
letters of credit, and financial guarantees. We note that credit
losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not recognized under
CECL.
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As mentioned above, ASU No. 2016-13 also introduces PCD assets as a
replacement for PCI assets. The PCD asset definition covers a broader
range of assets than the PCI asset definition. CECL requires System
institutions to estimate and record credit loss allowances for a PCD
asset at the time of purchase. The credit loss allowance is then added
to the purchase price to determine the amortized cost basis of the
asset for financial reporting purposes. Post-acquisition increases in
credit loss allowances on PCD assets will be established through a
charge to earnings. This is different from the current treatment of PCI
assets, for which System institutions are not permitted to estimate and
recognize credit loss allowances at the time of purchase. Rather, in
general, credit loss allowances for PCI assets are estimated after the
purchase only if there is deterioration in the expected cash flows from
the assets.\4\
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\4\ The System currently holds limited PCI assets, which have
generally been acquired through business combinations. We do not
believe the amount of PCD assets in the System after the adoption of
CECL will be materially different.
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ASU No. 2016-13 also introduces new requirements for Available-For-
Sale (AFS) debt securities. The new accounting standard requires that a
System institution recognize credit losses on individual AFS debt
securities through credit loss allowances, rather than through direct
write-downs, as is currently required under U.S. GAAP. AFS debt
securities will continue to be measured at fair value, with changes in
fair value not related to credit losses recognized in other
comprehensive income. Credit loss allowances on an AFS debt security
are limited to the amount by which the security's fair value is less
than its amortized cost.
Upon adoption of CECL, a System institution will record a one-time
adjustment to its credit loss allowances as of the beginning of its
fiscal year of adoption equal to the difference, if any, between the
amount of credit loss allowances required under the incurred loss
methodology and the amount of credit loss allowances required under
CECL. Except for PCD assets, the adjustment to credit loss allowances
would be recognized with offsetting entries to deferred tax assets
(DTAs), if appropriate, and to the fiscal year's beginning retained
earnings.
The effective date of ASU No. 2016-13 varies for different banking
organizations. For banking organizations that are public business
entities (PBE) but not SEC filers (as defined in U.S. GAAP),\5\ ASU No.
2016-13 will become effective for the first fiscal year beginning after
December 15, 2020, including interim periods within that fiscal year.
The Federal Farm Credit Banks Funding Corporation (Funding Corporation)
meets the definition of a
[[Page 49686]]
PBE,\6\ and it is our understanding that all System institutions will
implement the new standard for purposes of System-wide combined
financial statements for the quarter ending March 31, 2021.
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\5\ A public business entity (PBE) that is not an SEC filer
includes: (1) An entity that has issued securities that are traded,
listed, or quoted on an over-the-counter market, or (2) an entity
that has issued one or more securities that are not subject to
contractual restrictions on transfer and is required by law,
contract, or regulation to prepare U.S. GAAP financial statements
(including footnotes) and make them publicly available periodically.
For further information on the definition of a PBE, refer to ASU No.
2013-12, Definition of a Public Business Entity, issued in December
2013.
\6\ The Funding Corporation is the fiscal agent and disclosure
agent for the System. The Funding Corporation is responsible for
issuing and marketing debt securities to finance the System's loans,
leases, and operations and for preparing and producing the System's
financial results.
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C. Regulatory Capital
Changes necessitated by CECL to a System institution's retained
earnings, DTAs, and allowances will affect its regulatory capital
ratios.\7\ Specifically, retained earnings are a key component of a
System institution's common equity tier 1 (CET1) capital. An increase
in a System institution's allowances, including those estimated under
CECL, generally will reduce the institution's earnings or retained
earnings, and therefore its CET1 capital.\8\
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\7\ These capital ratios are specified in FCA regulation Sec.
628.10.
\8\ However, allowances recognized on PCD assets upon adoption
of CECL and upon later purchases of PCD assets generally would not
reduce the System institution's earnings, retained earnings, or CET1
capital.
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Depending on the nature of the difference, DTAs arising from
temporary differences (temporary difference DTAs) are included in a
System's institution's risk-weighted assets or are deducted from CET1
capital.\9\ Increases in allowances generally give rise to increases in
temporary difference DTAs that will partially offset the reduction in
earnings or retained earnings.\10\ Under Sec. 628.20(d)(3), the ALL is
included in a System institution's tier 2 capital up to 1.25 percent of
its standardized total risk-weighted assets not including any amount of
the ALL.\11\
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\9\ DTAs arising from temporary differences in relation to net
operating loss carrybacks are risk-weighted at 100 percent under
Sec. 628.32(l)(3). DTAs that arise from net operating loss and tax
credit carryforwards, net of any related valuation allowances and
net of deferred tax liabilities in accordance with Sec. 628.22(e),
are deducted from CET1 capital under Sec. 628.22(a)(3). All other
DTAs are risk-weighted at 100 percent under Sec. 628.32(l)(5). DTAs
are immaterial at most System institutions.
\10\ See Accounting Standards Codification Topic 740, ``Income
Taxes.''
\11\ Under Sec. 628.2, any amount of ALL greater than the 1.25
percent limit is deducted from standardized total risk-weighted
assets.
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II. Description of the Proposed Rule
To address the forthcoming implementation of changes to U.S. GAAP
resulting from the FASB's issuance of ASU No. 2016-13 and to improve
consistency between our capital rules and U.S. GAAP, we propose to
amend our capital rules to identify which credit loss allowances under
the new accounting standard are eligible for inclusion in a System
institution's regulatory capital.\12\ In particular, FCA is proposing
to add adjusted allowances for credit losses (AACL) as a newly defined
term in the capital rules. AACL would include credit loss allowances
related to financial assets, except for allowances for PCD assets and
AFS debt securities.\13\ AACL would be eligible for inclusion in a
System institution's tier 2 capital subject to the current limit for
including ALL in tier 2 capital under the capital rules.
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\12\ Note that Sec. 621.3 requires institutions to prepare
financial statements in accordance with GAAP, except as otherwise
directed by statutory and regulatory requirements.
\13\ This exclusion of credit loss allowances on PCD assets and
AFS debt securities is what differentiates AACL from the term
allowance for credit losses (ACL), which is used by the FASB in ASU
2016-13 and which applies to both financial assets and AFS debt
securities. Consistent with the proposal and as described in the
following sections, the AACL definition includes only those
allowances that have been charged against earnings or retained
earnings.
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The proposal also would provide a separate capital treatment for
allowances associated with AFS debt securities and PCD assets that
would apply to System institutions upon adoption of ASU 2016-13; revise
regulatory disclosure requirements that would apply to System banks
following their adoption of CECL; \14\ and make conforming amendments
to the FCA's other regulations that refer to credit loss allowances to
reflect the implementation of ASU No. 2016-13.
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\14\ Section 628.63 requires System banks to disclose items such
as capital structure, capital adequacy, credit risk, and credit risk
mitigation.
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Our capital rules are similar to the standardized approach capital
rules that the Federal banking regulatory agencies (FBRAs) \15\ adopted
for the banking organizations they regulate, while taking into account
the cooperative structure and the organization of the System. The FBRAs
published a CECL rule in February 2019.\16\ Our proposal is very
similar to the FBRAs' rule.\17\
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\15\ The FBRAs are the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, and
the Federal Deposit Insurance Corporation.
\16\ 84 FR 4222 (February 14, 2019).
\17\ FCA staff met with System representatives during the
development of this rule to seek their input on certain issues. The
questions discussed were similar to the questions asked in the
preamble to the FBRA's proposed CECL rule. (83 FR 22312, May 14,
2018). We considered this input in developing this proposal.
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A. Proposed Revisions to the Capital Rules To Reflect the Change in
U.S. GAAP
1. Introduction of Adjusted Allowances for Credit Losses as a Newly
Defined Term
FCA is proposing to revise the capital rules to reflect the revised
accounting standard for credit losses under U.S. GAAP as it relates to
System institutions' calculation of regulatory capital ratios. Under
the proposal, the new capital term AACL, rather than ALL, would apply
to all System institutions. Consistent with the treatment of ALL under
FCA's capital rules, amounts of AACL would be eligible for inclusion in
an institution's tier 2 capital up to 1.25 percent of the institution's
standardized total risk-weighted assets not including any amount of the
AACL.
CECL allowances cover a broader range of financial assets than ALL
under the incurred loss methodology. Under the capital rules, ALL
includes valuation allowances that have been established through a
charge against earnings to cover estimated credit losses on loans or
other extensions of credit as determined in accordance with U.S. GAAP.
Under CECL, credit loss allowances represent an accounting valuation
account, measured as the difference between the financial assets'
amortized cost basis and the amount expected to be collected on the
financial assets (i.e., lifetime credit losses). Thus, AACL would
include allowances for expected credit losses on HTM debt securities
and lessors' net investments in leases that have been established to
reduce these assets to amounts expected to be collected, as determined
in accordance with U.S. GAAP. AACL also would include allowances for
expected credit losses on off-balance sheet credit exposures not
accounted for as insurance, as determined in accordance with U.S. GAAP.
As described below, however, credit loss allowances related to AFS debt
securities and PCD assets would not be included in the definition of
AACL.
2. Definition of Carrying Value
FCA is proposing to revise the regulatory definition of carrying
value under the capital rules to provide that, for all assets other
than AFS debt securities and PCD assets, the carrying value is not
reduced by any associated credit loss allowance.
i. Available-for-Sale Debt Securities
Current accounting standards require a System institution to make
an individual assessment of each of its AFS
[[Page 49687]]
debt securities and take a direct write-down for credit losses when
such a security is other-than-temporarily impaired. The amount of the
write-down is charged against earnings, which reduces CET1 capital and
also results in a reduction in the same amount of the carrying value of
the AFS debt security. ASU No. 2016-13 revises the accounting for
credit impairment of AFS debt securities by requiring System
institutions to determine whether a decline in fair value below an AFS
debt security's amortized cost resulted from a credit loss, and to
record any such credit impairment through earnings with a corresponding
allowance. Similar to the current regulatory treatment of credit-
related losses for other-than-temporary impairment, under the proposal,
all credit losses recognized on AFS debt securities would flow through
to CET1 capital and reduce the carrying value of the AFS debt security.
Since the carrying value of an AFS debt security is its fair value,
which would reflect any credit impairment, credit loss allowances for
AFS debt securities required under the new accounting standard would
not be eligible for inclusion in a System institution's tier 2 capital.
ii. Purchased Credit Deteriorated Assets
Under the new accounting standard, PCD assets are acquired
individual financial assets (or acquired groups of financial assets
with shared risk characteristics) that, as of the date of acquisition
and as determined by an acquirer's assessment, have experienced a more-
than-insignificant deterioration in credit quality since origination.
The new accounting standard will require a System institution to
estimate expected credit losses that are embedded in the purchase price
of a PCD asset and recognize these amounts as an allowance as of the
date of acquisition. As such, the initial allowance amount for a PCD
asset recorded on a System institution's balance sheet will not be
established through a charge to earnings. Post-acquisition increases in
allowances for PCD assets will be established through a charge against
earnings.
Including in tier 2 capital allowances that have not been charged
against earnings would diminish the quality of regulatory capital.
Accordingly, FCA is proposing to maintain the requirement that
valuation allowances be charged against earnings in order to be
eligible for inclusion in tier 2 capital. FCA is also clarifying that
valuation allowances that are charged to retained earnings in
accordance with U.S. GAAP (i.e., the allowances required at CECL
adoption) are eligible for inclusion in tier 2 capital.
As in the FBRAs' final rule, FCA is not proposing to allow System
institutions to bifurcate PCD allowances to include post-acquisition
allowances in the definition of AACL; we are concerned that a
bifurcated approach could create undue complexity and burden for System
institutions when determining the amount of credit loss allowances for
PCD assets eligible for inclusion in tier 2 capital. In addition,
System institutions have very little, if any, allowances for PCI assets
and, as discussed above, this will not change with the change to PCD
assets. Therefore, the proposal excludes all PCD allowances from being
included in tier 2 capital.\18\ The proposal also revises the
definition of carrying value such that for PCD assets the carrying
value is calculated net of allowances. This treatment of PCD assets
would, in effect, reduce a System institution's standardized total
risk-weighted assets, similar to the proposed treatment for credit loss
allowances for AFS debt securities.
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\18\ This proposal excludes both initial PCD allowances and
post-acquisition PCD allowances from being included in tier 2
capital. As noted above, the initial allowance for a PCD asset will
not be established through a charge to earnings (the allowance is
estimated on the date of acquisition). However, post-acquisition
increases in allowances for PCD assets are established through a
charge against earnings.
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3. Additional Considerations
As in the FBRAs' final rule, FCA is not proposing to change the
limit of 1.25 percent of risk-weighted assets governing the amount of
AACL eligible for inclusion in tier 2 capital. Should this limit be
finalized as proposed, FCA intends to monitor the effects of this limit
on regulatory capital and System institution lending practices. This
ongoing monitoring will include the review of data, including data
provided by System institutions, and will assist FCA in determining
whether a further change to the capital rules' treatment of AACL might
be warranted. To the extent FCA determines that further revisions to
the capital rules are necessary, we would seek comment through a
separate proposal.
In addition, unlike the FBRAs, FCA is not proposing a phase-in of
the day-one effects of CECL on regulatory capital ratios. The FBRAs
included an optional three-year transition period for banking
organizations to reduce the potential day-one adverse effects that CECL
may have on a banking organization's regulatory capital ratios. The
FBRAs included this transition period because of concerns that some
banking organizations might face difficulties in capital planning
because of uncertainty about the economic environment at the time of
CECL adoption.\19\
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\19\ CECL requires consideration of current and future expected
economic conditions to estimate allowances. To an extent, these
conditions will not be known until closer to an institution's CECL
adoption date.
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The FBRAs will use a banking organization's regulatory capital
ratios, as adjusted by the transition provision, to determine whether
the organization is in compliance with its regulatory capital
requirements (including capital buffer and prompt corrective action
(PCA) requirements). However, the FBRAs will continue to examine
banking organizations' credit loss estimates and allowance balances
through the supervisory process regardless of whether they have elected
to use the transition provision. In addition, the FBRAs may examine
whether banking organizations will have adequate amounts of capital at
the expiration of the transition provision period.\20\
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\20\ 84 FR 4229 (February 14, 2019).
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We are not proposing a transition period for the following reasons.
First, a transition provision appears to be unnecessary for any
System institution because, even without a transition period, they are
all expected to be sufficiently capitalized to absorb the day one
impact of CECL for the purpose of complying with regulatory capital
requirements. In particular, if the allowances as estimated under CECL
increase, CET1 capital (including retained earnings) will decrease and
tier 2 capital will increase; \21\ we believe total capital will be
largely unchanged at the majority of System institutions. Even though a
transition period like the FBRAs adopted would not affect the FCA's
supervisory oversight, we do not anticipate the impacts of CECL
prompting any increase in supervisory concern or response. Moreover,
the capital ratios of all System institutions--CET1; Tier 1; Total
Capital; and Tier 1 Leverage--are expected to remain above the
regulatory minimums and buffers after the implementation of CECL, even
without a transition period. An institution's ability to provide loans
and related services without a transition provision would be hindered
only if the
[[Page 49688]]
institution's capital measures would fall below its regulatory capital
requirements without the transition provision.\22\
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\21\ As of March 31, 2019, the combined System-wide allowance
for loan losses and reserve for losses on unfunded commitments as a
percentage of risk weighted assets was 0.57 percent. As mentioned
above, under revised Sec. 628.20(d)(3), the AACL would be included
in a System institution's tier 2 capital up to 1.25 percent of its
standardized total risk-weighted assets not including any amount of
the AACL.
\22\ Unlike the banking organizations regulated by the FBRAs,
System institutions have no PCA requirements and therefore have no
concerns about triggering such requirements.
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Second, we believe either an optional or a mandatory transition
period would lead to unnecessary complexity and operational burden that
is not warranted in light of our belief that a transition period is not
needed. An optional transition period, like that adopted by the FBRAs,
could be difficult to implement and maintain for System institutions in
at least two districts that make use of common standardized
applications for computing and reporting regulatory capital. A
transition period utilized by some institutions in such districts but
not by others would appear to complicate supporting the common
reporting platforms for those institutions. In addition, allowing an
optional transition period would create a lack of comparability among
System institutions' capital levels.
A mandatory transition period might not be wanted by institutions
that already have plans to absorb the day-one impact of CECL and have
incurred sunk costs in making changes to processes for calculating and
reporting regulatory capital ratios for FCA Uniform Reports of
Financial Condition and Performance (Call Reports) and shareholder
reporting.
Closer to the adoption of CECL, and in the unlikely event that its
day-one impact threatens regulatory capital compliance or patronage
practices, FCA may consider other options to reduce unanticipated
impacts of the accounting change. The type of action would depend on
the materiality of CECL's impact and how widespread the issue is
throughout the System.
We request comment on the following issues relative to a transition
period:
1. We invite comment on whether FCA should adopt a transition
period for the day-one impact CECL may have on an institution's
regulatory capital ratios. If you believe we should adopt a transition
period, please explain whether you believe it should be mandatory or
optional, and please address the reasons we have discussed for not
proposing a transition period. Please provide analysis to support your
position.
2. We invite comment on alternatives to a transition period that
might accommodate institutions in their implementation of the CECL
requirements. Please explain what these alternatives are and why they
would be necessary. Please explain why our reasons for not proposing a
transition period would not apply to these alternatives. Please provide
analysis to support your position.
B. Disclosures and Regulatory Reporting
Under the proposed rule, System banks would be required to update
their disclosures required under Sec. 628.63 to reflect the adoption
of CECL. For example, System banks would be required to disclose AACL
instead of ALL after adoption.
In addition, to reflect changes in U.S. GAAP, FCA anticipates
revising the Call Reports as part of its annual review process. These
revisions would specify the affected line items in the capital
schedules and the newly defined term AACL. In addition, FCA intends to
update instructions for all affected Call Report schedule references to
ALL. If we adopt this rule as proposed, we expect to make these changes
for the March 31, 2021 reporting period.
C. Conforming Changes
A number of existing FCA regulations outside of Part 628 refer to
ALL or to ``loan loss.'' ASU No. 2016-13 removes impairment approaches
and related terminology, including replacing the term ALL with
allowance for credit losses (ACL). The proposed rule would replace the
references to ALL or ``loan loss'' in our regulations with references
to ACL or ``credit loss,'' as appropriate. In addition, several
regulations that refer to ``allowance for losses'' more appropriately
should refer to ACL.
Both the part 620 regulations governing the contents of the annual
report to shareholders and the part 630 regulations governing the
contents of the annual report to investors require that the discussion
and analysis of risk exposures analyze the allowance for loan losses.
The proposal would amend the analysis requirement for consistency with
ASU No. 2016-13, which requires an analysis of the allowance for credit
losses by year of origination (vintage year) and the allowance be
supported by reasonable and supportable forecasts. The proposal would
also replace terms in the requirement that references ``loan loss''
with references to ``credit loss,'' as appropriate.
In the capital rules codified at part 628, as well as in other
regulations that refer to the capital rules, the proposal would replace
references to ALL with AACL. In the capital disclosures at Sec.
628.63, references to ``probable loan losses'' and ``loan losses''
would be updated with ACL or AACL, as applicable.
The proposed rule would make conforming changes in regulations in
the following parts:
Part 611--Organization
Part 615--Funding and Fiscal Affairs, Loan Policies and
Operations, and Funding Operations
Part 620--Disclosure to Shareholders
Part 621--Accounting and Reporting Requirements
Part 628--Capital Adequacy of System Institutions
Part 630--Disclosure to Investors in System-Wide and
Consolidated Bank Debt Obligations of the Farm Credit System.
D. Supervisory Guidance on the ACL
If this rule is adopted, we expect to issue supervisory guidance on
the ACL. Until that time, many concepts, processes, and practices
detailed in existing supervisory guidance on the ALL would continue to
remain relevant under CECL. Relevant guidance includes, but is not
limited to, information related to management's responsibility for the
allowance estimation process, the board of directors' responsibility
for overseeing management's process, and the need for institutions to
appropriately support and document their allowance estimates.\23\ Until
new guidance is issued, institutions should consider the relevant
sections of existing ALL guidance in their implementation of the new
accounting standard.
---------------------------------------------------------------------------
\23\ Existing supervisory guidance includes: FCA Bookletter 49,
Adequacy of Farm Credit System Institutions' Allowance for Loan
Losses and Risk Funds, April 26, 2004; FCA Informational Memorandum,
Computer-Based Model Validation Expectations, June 17, 2002; FCA
Informational Memorandum, Allowance for Loan Losses, June 30, 2009;
and FCA Exam Manual, Allowance for Loan Losses, November 17, 2015.
---------------------------------------------------------------------------
E. Additional Request for Comment
FCA seeks comment on all aspects of the proposal. Comments are
requested about the potential impact, if any, of the proposal in
ensuring the safety and soundness of individual System institutions as
well as on the stability of the Farm Credit System.
III. Timeframe for Implementation
We intend the effective date of the final rule to be January 1,
2021. As mentioned above, the effective date of ASU No. 2016-13 will
become effective for the Funding Corporation for the first fiscal year
beginning after December 15, 2020, including interim periods within
that fiscal year, and System institutions will implement the new
standard for purposes of System-wide combined financial statements for
the Call Report quarter ending March 21, 2021.
[[Page 49689]]
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with its
affiliated associations, has assets and annual income in excess of the
amounts that would qualify them as small entities. Therefore, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.
Lists of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 621
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 628
Accounting, Agriculture, Banks, banking, Capital, Government
securities, Investments, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.
For the reasons stated in the preamble, the Farm Credit
Administration proposes to amend parts 611, 615, 620, 621, 628, and 630
of chapter VI, title 12 of the Code of Federal Regulations as follows:
PART 611--ORGANIZATION
0
1. The authority citation for part 611 is revised to read as follows:
Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2,
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 4.3A, 4.12,
4.12A, 4.15, 4.20, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25, 7.0-
7.3, 7.6-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011,
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121,
2122, 2123, 2124, 2128, 2129, 2130, 2154a, 2183, 2184, 2203, 2208,
2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279a-3, 2279b-
2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101
Stat. 1568, 1638 (12 U.S.C. 2071 note and Sec. 2202 note).
Sec. 611.515 [Amended]
0
2. Amend Sec. 611.515 paragraph (b)(6)(ii)(E) by removing the word
``loan'' and adding in its place the word ``credit''.
Sec. 611.1122 [Amended]
0
3. Amend Sec. 611.1122 by:
0
a. Removing in paragraph (e)(6)(iii), the word ``loan'' and adding in
its place the word ``credit''; and
0
b. Removing in paragraph (e)(10), the words ``loan losses'' and adding
in its place the words ``credit losses'' both places it appears.
Sec. 611.1130 [Amended]
0
4. Amend Sec. 611.1130 paragraph (b)(4)(i) by removing the words
``allowance for losses'' and adding in its place the words ``allowance
for credit losses''.
Sec. 611.1223 [Amended]
0
5. Amend Sec. 611.1223 paragraph (c)(23)(ii) by removing the words
``allowance for losses'' and adding in its place the words ``allowance
for credit losses''.
Sec. 611.1250 [Amended]
0
6. Amend Sec. 611.1250 paragraph (b)(5)(i)(B) by removing the words
``loan'' and adding in its place the words ``credit''.
Sec. 611.1255 [Amended]
0
7. Amend Sec. 611.1255 paragraph (b)(5)(i)(B) by removing the words
``general allowance for losses'' and adding in its place the words
``general allowance for credit losses''.
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
0
8. The authority citation for part 615 is revised to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4,
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C.
2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15
U.S.C. 78o-7 note).
Sec. 615.5050 [Amended]
0
9. Amend Sec. 615.5050 by:
0
a. Removing in paragraph (c)(1), the words ``allowance for loan
losses'' and adding in its place the words ``allowance for credit
losses''; and
0
b. Removing in paragraphs (c)(2) through (4) the words ``allowance for
losses'' and adding in its place the words ``allowance for credit
losses''.
Sec. 615.5132 [Amended]
0
10. Amend Sec. 615.5132 paragraph (a) by removing the words ``loan
loss adjustments'' and adding in its place the words ``credit loss
adjustments''.
Sec. 615.5140 [Amended]
0
11. Amend Sec. 615.5140 paragraph (b)(4)(ii) by removing the words
``loan loss'' and adding in its place the words ``credit loss''.
Sec. 615.5200 [Amended]
0
12. Amend Sec. 615.5200 paragraph (c)(4) by adding the word ``credit''
before ``losses''.
Sec. 615.5201 [Amended]
0
13. Amend Sec. 615.5201 by removing the words ``allowance for loan
losses'' and adding in its place the words ``adjusted allowance for
credit losses'' in the definition of ``Risk-adjusted asset base''.
Sec. 615.5351 [Amended]
0
14. Amend Sec. 615.5351 paragraph (d) by adding the word ``credit''
before ``loss.''
PART 620--DISCLOSURE TO SHAREHOLDERS
0
15. The authority citation for part 620 continues to read as follows:
Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254).
Sec. 620.5 [Amended]
0
16. Amend Sec. 620.5 by:
0
a. Removing in paragraph (f)(1)(i)(D), the words ``Allowance for
losses'' and adding in its place the words ``Allowance for credit
losses'';
0
b. Removing in paragraph (f)(1)(ii)(B), the words ``Provision for loan
losses'' and adding in its place the words ``Provision for credit
losses'';
0
c. Removing in paragraph (f)(1)(iii)(F), the words ``Allowance for loan
losses-to-loans'' and adding in its place the words ``Allowance for
credit losses-to-loans'';
0
d. Revising paragraph (g)(1)(iv)(B);
0
e. Removing in paragraph (g)(1)(iv)(E), the words ``allowance for
losses'' and adding in its place the words ``allowance for credit
losses.''
The revision reads as follows:
* * *
(g) * * *
(1) * * *
[[Page 49690]]
(iv) * * *
(B) An analysis of the allowance for credit losses by year of
origination (vintage year). The number of years analyzed must be
consistent with vintage year disclosures required by generally accepted
accounting principles. The analysis must include the ratios of the
allowance for credit losses to loans and net chargeoffs to average
loans and a discussion of the adequacy of the allowance for credit
losses given reasonable and supportable forecasts;
* * * * *
PART 621--ACCOUNTING AND REPORTING REQUIREMENTS
0
17. The authority citation for part 621 is revised to read as follows:
Authority: Secs. 5.17, 5.19, 5.22A, 8.11 of the Farm Credit Act
(12 U.S.C. 2252, 2257a, 2279aa-11).
Sec. 621.5 [Amended]
0
18. Amend Sec. 621.5 by:
0
a. Removing in the heading, the word ``loan'' and adding in its place
the word ``credit''; and
0
b. Removing in paragraphs (a) and (b), the word ``loan'' and adding in
its place the word ``credit''.
Sec. 621.8 [Amended]
0
19. Amend Sec. 621.8 paragraph (c)(2) by removing the word ``loan''
and adding in its place the word ``credit''.
PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS
0
20. The authority citation for part 628 is revised to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4,
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C.
1254 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15
U.S.C. 78o-7 note).
Sec. 628.2 [Amended]
0
21. Amend Sec. 628.2 by:
0
a. Adding in alphabetical order a definition for ``Adjusted allowances
for credit loss (AACL)'';
0
b. Removing the definition of ``Allowances for loan losses (ALL)''; and
0
c. Adding in the definition ``Carrying value'' a new last sentence;
0
d. Revising ``Standardized total risk-weighted assets'' definitions
second paragraph (2).
The additions and revision reads as follows:
Sec. 628.2 Definitions
* * * * *
Adjusted allowances for credit losses (AACL) means valuation
allowances that have been established through a charge against earnings
or retained earnings for expected credit losses on financial assets
measured at amortized cost and a lessor's net investment in leases that
have been established to reduce the amortized cost basis of the assets
to amounts expected to be collected as determined in accordance with
GAAP. For purposes of this part, adjusted allowances for credit losses
includes allowances for expected credit losses on off-balance sheet
credit exposures not accounted for as insurance as determined in
accordance with GAAP. Adjusted allowances for credit losses excludes
allowances created that reflect credit losses on purchased credit
deteriorated assets and available-for-sale debt securities.
* * * * *
Carrying value * * * For all assets other than available-for-sale
debt securities or purchased credit-deteriorated assets, the carrying
value is not reduced by any associated credit loss allowance that is
determined in accordance with GAAP.
* * * * *
Standardized total risk-weighted assets means:
* * *
(2) Any amount of the System institution's adjusted allowance for
credit losses that is not included in tier 2 capital.
* * * * *
Sec. 628.20 [Amended]
0
22. Amend Sec. 628.20 paragraph (d)(3) by removing the word ``ALL''
and adding in its place the word ``AACL'' each place it appears.
Sec. 628.22 [Amended]
0
23. Amend Sec. 628.22 paragraph (c) by removing the word ``ALL'' in
footnote 6 and adding in its place the word ``AACL''.
Sec. 628.63 [Amended]
0
24. Amend Table 5 to Section 628.63--Credit Risk: General Disclosures
by:
0
a. Removing in paragraphs (a)(5), (e)(5), and (g), the words
``allowance for loan losses'' and adding in its place the words
``adjusted allowance for credit losses''; and
0
b. Removing in footnote 6, the words ``probable loan losses'' and
adding in its place the words ``credit losses''.
PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
0
25. The authority citation for part 630 is revised to read as follows:
Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254).
Sec. 630.20 [Amended]
0
26. Amend Sec. 630.20 by:
0
a. Removing in paragraph (f)(1)(ii), the words ``Allowance for losses''
and adding in its place the words ``Allowance for credit losses'';
0
b. Removing in paragraph (f)(2)(iii), the words ``Provision for loan
losses'' and adding in its place the words ``Provision for credit
losses'';
0
c. Removing in paragraph (f)(3)(v), the words ``Allowance for losses''
and adding in its place the words ``Allowance for credit losses'' and
0
d. Revising paragraph (g)(1)(ii)(B).
The revision reads as follows:
* * *
(B) An analysis of the allowance for credit losses by year of
origination (vintage year). The number of years analyzed must be
consistent with vintage year disclosures required by generally accepted
accounting principles. The analysis must include the ratios of the
allowance for loan credit losses to loans and net chargeoffs to average
loans and a discussion of the adequacy of the allowance for credit
losses given reasonable and supportable forecasts.
* * * * *
Appendix A to Part 630--Supplemental Information Disclosure Guidelines
[Amended]
0
27. Amend Appendix A to Part 630 by removing the words ``loan losses''
and adding in its place the words ``credit losses'' in Table B wherever
they appear.
Dated: August 14, 2019.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2019-19916 Filed 9-20-19; 8:45 am]
BILLING CODE 6705-01-P
