US Agencies (FDIC, FED, and OCC) decided to adjust the calculation for credit concentration ratios used in the supervisory process. The adjustment is in response to changes in the capital information available after the implementation of the Community Bank Leverage Ratio (CBLR) rule. Effective March 31, 2020, for supervisory purposes, examiners will calculate credit concentration ratios using tier 1 capital plus the appropriate allowance for loan and lease losses or the allowance for credit losses attributed to loans and leases (as applicable) for the denominator.
Effective March 31, 2020, qualifying community banking organizations that elect the CBLR framework are not required to report tier 2 capital, which historically has been a part of the denominator used in calculating credit concentration ratios for supervisory processes. In response to this regulatory change, for supervisory purposes, the agencies are adjusting their calculation for credit concentration ratios. As of March 31, 2020, the agencies' examiners will calculate ratios that measure credit concentrations using:
- Tier 1 capital plus the entire allowance for loan and lease losses as the denominator
- Tier 1 capital plus the portion of the allowance for credit losses attributable to loans and leases as the denominator for banking organizations that have adopted the FASB Accounting Standards Codification Topic 326, Financial Instruments—Credit Losses, which implements the current expected credit loss (CECL) methodology.
These approaches are expected to provide a consistent methodology for calculating these ratios at all insured depository institutions and to approximate the agencies' historical methodology for calculating credit concentration ratios. For banking organizations that have not adopted CECL, the agencies’ examiners will calculate credit concentration ratios using tier 1 capital plus the entire allowance for loan and lease losses as the denominator. This adjustment, which provides a consistent supervisory approach for all banking organizations, applies only to supervisory calculations for credit concentration ratios and does not affect the calculation of total capital for other purposes.
Effective Date: March 31, 2020
Keywords: Americas, US, Banking, CBLR Framework, CECL, Tier 1 Capital, Regulatory Capital, Concentration Risk, Financial Instruments, IFRS 9, US Agencies
Previous ArticleIAIS Publishes Newsletter for March 2020
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).