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Law360 (August 26, 2020, 9:41 PM EDT) -- Federal banking regulators on Wednesday issued final versions of emergency rules that were rolled out earlier this year with the goal of giving banks more latitude to support lending to U.S. households and businesses during the coronavirus pandemic.
The Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency approved a trio of rules confirming interim regulations issued at the outset of the COVID-19 crisis that temporarily lowered the community bank leverage ratio, offered a longer phase-in period for the new current expected credit losses, or CECL, accounting standard and sought to soften certain bank capital distribution restrictions seen as potentially discouraging lending in a downturn.
The agencies said the final rules are "identical or substantially similar" to their predecessors from March and April. Notably, however, eligibility for the delayed CECL implementation provision was expanded to include any bank that chooses to adopt the new accounting standard in 2020, not just those that were already required to under generally accepted accounting principles.
"With the 2020 CECL transition provision provided by the interim final rule, as clarified by the final rule, banking organizations have time to adapt capital planning under stress to the new credit loss accounting standard, improving their flexibility and enhancing their ability to serve as a source of credit to the U.S. economy," the regulators said in a rulemaking document.
The agencies added that they "do not have information necessary" to gauge how many banks might take advantage of this expanded eligibility.
Under Wednesday's final rules, banks that switch this year to CECL — which replaces the older "incurred loss" approach to recognizing credit losses — can postpone their estimated impact on their regulatory capital for two years. Combined with a three-year transition period finalized by regulators in 2018, the delay means banks can take up to five years to fully phase in the new standard.
The final rules also implement the temporary community bank leverage ratio reduction that Congress folded into the Coronavirus Aid, Relief and Economic Security Act, the $2 trillion pandemic relief package enacted in March.
Introduced last year, that ratio was intended to help simplify smaller banks' capital requirements and was originally set at 9%, but lawmakers directed the agencies to drop it to 8% through the end of 2020 at the latest. The agencies subsequently issued interim rules to that effect in April and added provisions that will gradually unwind this reduction by 2022, changes that Wednesday's rules finalize.
In addition, the rules finalize revisions that the agencies made tentatively in March to limits on stock buybacks and other capital distributions that apply when a bank's capital levels dip below certain thresholds.
The changes, which have to do with how the regulators define a bank's "eligible retained income" in their capital rules, let those automatic limits kick in more progressively and make banks less likely to face "abrupt and restrictive" constraints on their payouts if their capital levels take a hit from economic stress, the agencies said, noting that overly tight limits could lead to ill-timed pullbacks in bank lending.
"The revised definition of eligible net income in the final rule allows banking organizations to more gradually reduce distributions as they enter stress and provides banking organizations with stronger incentives to continue to lend in a stressed scenario," the agencies said in their rulemaking materials.
Still, the regulators reiterated a note of caution from March about the potential safety and soundness effects.
"By enabling banking organizations to gradually decrease capital distributions in stress (rather than mandating a sharp decrease), the rule could incrementally reduce the banking organization's loss-absorption capacity in stress," the agencies said.
--Editing by Michael Watanabe.
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