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Federal Register / Vol. 86, No. 124 / Thursday, July 1, 2021 / Rules and Regulations
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The day-one adjustment will be 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. A
critical consideration for institutions subject to the new accounting rules will be the impact of CECL on capital.
Institutions could experience a sharp increase in expected credit losses on the effective date as a result of the day-one adjustment, which could lower their capital classification under relevant statutory and regulatory authorities such, as for example, under the Boards PCA regulations for credit unions.
B. The Boards August 19, 2020, Proposed Rule The Board issued the August 19, 2020, proposed rule to mitigate the adverse effects on a FICUs PCA
classification that may result from the day-one adjustment. Specifically, the proposed rule provides that, for purposes of the PCA regulations, the Board will phase-in the day-one effects on a FICUs net worth ratio over a threeyear period 12 quarters. The proposed phase-in is consistent with the similar three-year phase-in provided by the other banking agencies to alleviate the impacts of adopting CECL on the banking organization subject to their supervision.6
Under the proposed rule, the phase-in would only be applied to those FICUs that adopt the CECL methodology for fiscal years beginning on or after December 15, 2022. FICUs that elect to adopt CECL earlier than the deadline established by FASB would not be eligible for the phase-in. Further, unlike banking organizations subject to the rule issued by the other banking agencies, eligible FICUs would not have the choice of opting into or out of the phase-in. Rather, the Board will apply the phase-in for all FICUs that meet the prescribed eligibility criteria.
FICUs would continue to calculate their net worth in accordance with GAAP and would also continue to be required to account for CECL for all other purposes, such as Call Reports.
Further, under the proposed rule, FICUs with less than $10 million in assets would no longer be required to determine their charges for loan losses in accordance with GAAP. This provision would eliminate the adverse 6 See the February 14, 2019, proposed rule published by the Office of Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation, at 84 FR
4222 February 14, 2019, and modified by interimfinal rule published on March 31, 2020, at 62 FR
17723 March 31, 2020.

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PCA consequences for smaller FICUs resulting from CECL. The Boards regulations would allow these FICUs to instead make charges for loan losses in accordance with any reasonable reserve methodology incurred loss, provided that it adequately covers known and probable loan losses. Accordingly, FICUs in this asset-size category that choose to use the incurred loss methodology would not be subject to the phase-in described in this proposed rule.
Interested readers should refer to the preamble of the Boards August 19, 2020, proposed rule for additional background information regarding the proposed regulatory changes.
III. Legal Authority A. The Boards Rulemaking Authority, Generally The Board is issuing this final rule pursuant to its authority under the Federal Credit Union FCU Act.7 The FCU Act grants the Board a broad mandate to issue regulations governing both federal credit unions and all FICUs. For example, section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe rules and regulations for the administration of the act.8 Other provisions of the FCU Act, confer specific rulemaking authority to address prescribed issues or circumstances. For example, section 216 of the FCU Act directs the Board to establish by regulation a system of PCA to restore the net worth of FICUs.9 This final rule is being issued under both the general rulemaking authority conferred by section 120 of the FCU Act and also, as discussed below, the more specific grant of authority under section 216.
B. CECL Transition Section 216 of the FCU Act authorizes the NCUA Board to issue regulations adjusting the net worth ratio requirements for FICUs if the other banking agencies increase or decrease the required minimum level for the leverage limit pursuant to section 38 of the Federal Deposit Insurance FDI
Act.10 In addition, section 216 of the FCU Act also requires that the Board
determinein consultation with the other banking agenciesthe reason for the increase or decrease in the required minimum level for the leverage limit also justifies adjustment to the net worth ratios. 11 In accordance with the consultation requirements, the NCUA, at the proposed rule stage, briefed relevant staff of the other banking agencies of the contents and purposes of this rulemaking.
With regards to the other factor identified in the quoted statutory language, the February 14, 2019, final rule does not directly raise or lower the leverage limit,12 or any other of the capital ratios applicable to banking organizations. For example, the leverage limit defined as the ratio of tier 1
capital to average total consolidated assets remains unchanged at 4 percent.
Nevertheless, the stated intent of the other banking agencies was to effectively modify the capital ratios for purposes of PCA oversight. Accordingly, the NCUA has determined that both conditions set forth in section 216 have been satisfied for purposes of issuing this proposed rule.13
The effects of the proposed phase-in on a FICUs net worth calculations are consistent with section 216 of the FCU
Act and closely modeled on the CECL
transition provisions issued by the other banking agencies. Specifically, the final rule is narrowly tailored to temporarily mitigating the impacts of CECL adoption on the PCA classification of a FICUs net worth. This final rule does not adjust the numeric net worth ratios under the NCUAs PCA system. Further, the rule does not revise the definition of net worth, and FICUs will continue to calculate their net worth and net worth ratios in accordance with existing statutory and regulatory requirements.
The sole purpose of the phase-in is to aid FICUs in adjusting to the new GAAP
standards in a uniform manner and without disrupting their ability to serve their members.
The Board notes that while section 216 defines net worththe numerator for determining the net worth ratioit does not define the term total assets, which comprises the denominator of the equation. The definition of the term is 11 12

7 12

U.S.C. 1751 et seq.
8 12 U.S.C. 1766a.
9 12 U.S.C. 1790d. Other provisions of the FCU
Act providing the Board with specific rulemaking authority include section 207 12 U.S.C. 1787, which is a specific grant of authority over share insurance coverage, conservatorships, and liquidations. Section 209 12 U.S.C. 1789 grants the Board plenary regulatory authority to issue rules and regulations necessary or appropriate to carry out its role as share insurer for all FICUs.
10 12 U.S.C. 1790dc2A.

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U.S.C. 1790dc2B.
the leverage ratio in the banking agencies regulations governing capital adequacy standards. See, 12 CFR 12 CFR 3.10 OCC, 217.10
FRB, and 324.10 FDIC.
13 The Board also finds that the other banking agencies March 31, 2020, interim final rule on this subject does not affect this analysis because it affects only those banking organizations that have adopted CECL as of 2020 and does not alter the three-year phase-in for other banking organizations that are covered in the same category of FASBs standards.
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