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    FDIC Proposes Rule to Resolve Double-Counting Associated with CECL

    December 07, 2020

    FDIC proposed a rule that would amend the risk-based deposit insurance assessment system applicable to all large insured depository institutions, including highly complex insured depository institutions. The proposal is aimed to address the effects of temporary deposit insurance assessment resulting from certain optional regulatory capital transition provisions related to the implementation of the current expected credit losses (CECL) methodology. The primary objective of this proposal is to remove a double-counting issue in several financial measures used to determine deposit insurance assessments for large and highly complex banks; the double-counting could result in a deposit insurance assessment rate for a large or highly complex bank that does not accurately reflect the risk of a bank to the deposit insurance fund, all else equal. Comments must be received no later than January 06, 2021.

    FDIC statutorily required to set deposit insurance assessments based on risk and, through this proposal, FDIC aims to ensure that banks are assessed in a manner that is fair and accurate. The proposal would amend the assessment regulations to remove the double-counting of a portion of the CECL transitional amounts, in certain financial measures used to determine deposit insurance assessments for large and highly complex banks. Certain financial measures are calculated by summing Tier 1 capital, which includes the CECL transitional amounts, and reserves, already reflecting the implementation of CECL. As a result, a portion of the CECL transitional amounts is being double-counted in these measures, which in turn affects assessment rates for large and highly complex banks. The proposal would also adjust the calculation of the loss severity measure to remove the double-counting of a portion of the CECL transitional amounts for a large or highly complex bank.

    This proposal would amend the deposit insurance system applicable to large and highly complex banks only and it would not affect regulatory capital or the regulatory capital relief provided in the form of transition provisions that allow banking organizations to phase in the effects of CECL on their regulatory capital ratios. In calculating another measure—that is, the Tier 1 leverage ratio—used to determine assessment rates for all insured depository institutions, FDIC would continue to apply the CECL regulatory capital transition provisions, consistent with the regulatory capital relief provided to address concerns that despite adequate capital planning, unexpected economic conditions at the time of CECL adoption could result in higher-than-anticipated increases in allowances. The proposed amendments to the deposit insurance assessment system and any changes to reporting requirements pursuant to this proposal would be required only while the regulatory capital relief is reflected in the regulatory reports of banks.

     

    Related Link: Federal Register Notice

    Comment Due Date: January 06, 2021

    Keywords: Americas, US, Banking, CECL, Regulatory Capital, Tier 1 Capital, Deposit Insurance, Leverage Ratio, Large Banks, FDIC

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