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
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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