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Federal Register / Vol. 86, No. 36 / Thursday, February 25, 2021 / Rules and Regulations D. The 2020 CECL Rule As part of the efforts to address the disruption of economic activity in the United States caused by the spread of coronavirus disease 2019 COVID19, on March 31, 2020, the agencies adopted a second CECL transition provision through an interim final rule.17 The agencies subsequently adopted a final rule 2020 CECL rule on September 30, 2020, that is consistent with the interim final rule, with some clarifications and adjustments related to the calculation of the transition and the eligibility criteria for using the 2020
CECL transition provision.18 The 2020
CECL rule provides banking organizations that adopt CECL for purposes of GAAP as in effect January 1, 2020, for a fiscal year that begins during the 2020 calendar year, the option to delay for up to two years an estimate of CECLs effect on regulatory capital, followed by a three-year transition period i.e., a five-year transition period in total.19 The 2020
CECL rule does not replace the threeyear transition provision in the 2019
CECL rule, which remains available to any banking organization at the time that it adopts CECL.20

17 85

FR 17723 Mar. 31, 2020.
85 FR 61577 Sept. 30, 2020.
19 A banking organization that is required to adopt CECL under GAAP in the 2020 calendar year, but chooses to delay use of CECL for regulatory reporting in accordance with section 4014 of the Coronavirus Aid Relief, and Economic Security Act CARES Act, is also eligible for the 2020 CECL
transition provision. The CARES Act Pub. L. 116
136, 4014, 134 Stat. 281 March 27, 2020 provides banking organizations optional temporary relief from complying with CECL ending on the earlier of 1 the termination date of the current national emergency, declared by the President on March 13, 2020 under the National Emergencies Act 50 U.S.C.
1601 et seq. concerning COVID19; or 2
December 31, 2020. If a banking organization chooses to revert to the incurred loss methodology pursuant to the CARES Act in any quarter in 2020, the banking organization would not apply any transitional amounts in that quarter but would be allowed to apply the transitional amounts in subsequent quarters when the banking organization resumes use of CECL. The Consolidated Appropriations Act, 2021 Pub. L. 116260 Dec. 27, 2020 extended the optional temporary relief from complying with CECL afforded under the CARES
Act, with an end date on the earlier of 1 the first day of the fiscal year of the IDI, bank holding company, or any affiliate thereof that begins after the date on which the national emergency concerning the COVID19 outbreak declared by the President on March 13, 2020 under the National Emergencies Act 50 U.S.C. 1601 et seq. terminates;
or 2 January 1, 2022.
20 See 85 FR 61578 Sept. 30, 2020.
18 See
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E. Double Counting of a Portion of the CECL Transitional Amounts in Certain Financial Measures Used To Determine Assessments for Large or Highly Complex Banks An increase in a banking organizations allowances, including those estimated under CECL, generally will reduce the banking organizations earnings or retained earnings, and therefore, its Tier 1 capital. For banks electing the 2019 CECL rule, the CECL
transitional amount is the difference between the closing balance sheet amount of retained earnings for the fiscal year-end immediately prior to the banks adoption of CECL pre-CECL
amount and the banks balance sheet amount of retained earnings as of the beginning of the fiscal year in which it adopts CECL post-CECL amount. For banks electing the 2020 CECL rule transition provision, retained earnings are increased for regulatory capital calculation purposes by a modified CECL transitional amount that is adjusted to reflect changes in retained earnings due to CECL that occur during the first two years of the five-year transition period. Under the 2020 CECL
rule, the change in retained earnings due to CECL is calculated by taking the change in reported adjusted allowances for credit losses AACL 21 relative to the first day of the fiscal year in which CECL was adopted and applying a scaling multiplier of 25 percent during the first two years of the transition period. The resulting amount is added to the CECL transitional amount described above. Hence, the modified CECL transitional amount for banks electing the 2020 CECL rule is calculated on a quarterly basis during the first two years of the transition period. The bank reflects that modified CECL transitional amount, which includes 100 percent of the day-one impact of CECL on retained earnings plus a portion of the difference between AACL reported in the most recent regulatory report and AACL as of the beginning of the fiscal year that the banking organization adopts CECL, in the transitional amount applied to 21 The 2019 CECL rule defined a new term for regulatory capital purposes, adjusted allowances for credit losses AACL. The meaning of the term AACL for regulatory capital purposes is different from the meaning of the term allowances of credit losses ACL used in applicable accounting standards. The term allowance for credit losses as used by the FASB in ASU 201613 applies to both financial assets measured at amortized cost and AFS debt securities. In contrast, the AACL
definition includes only those allowances that have been established through a charge against earnings or retained earnings. Under the 2019 CECL rule, the term AACL, rather than ALLL, applies to a banking organization that has adopted CECL.

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retained earnings in regulatory capital calculations.22
For banks electing the 2020 CECL rule transition provision that enter the third year of their transition period and for banks electing the three-year 2019 CECL
rule transition provision, banks must calculate the transitional amount to phase into their retained earnings for purposes of their regulatory capital calculations over a three-year period.
For banks electing the 2019 CECL rule, the CECL transitional amount is the difference between the pre-CECL
amount of retained earnings and the post-CECL amount of retained earnings.
For banks electing the 2020 CECL rule that enter the third year of their transition, the modified CECL
transitional amount is the difference between the banks AACL at the end of the second year of the transition period and its AACL as of the beginning of the fiscal year of CECL adoption multiplied by 25 percent plus the CECL transitional amount described above. The CECL
transitional amount or, at the end of the second year of the transition period for banks electing the 2020 CECL rule, the modified CECL transitional amount, is fixed and must be phased in over the three-year transition period or the last three years of the transition period, respectively, on a straight-line basis, 25
percent in the first year or third year for banks electing the 2020 CECL rule, and an additional 25 percent of the transitional amount over each of the next two years.23 At the beginning of the sixth year for banks electing the 2020
CECL rule, or the beginning of the fourth year for banks electing the 2019
CECL rule, the electing bank would have completely reflected in regulatory capital the day-one effects of CECL
plus, for banks electing the 2020 CECL
rule, an estimate of CECLs effect on regulatory capital, relative to the 22 See
85 FR 61580 Sept. 30, 2020.
when calculating regulatory capital, a bank electing the 2019 CECL rule transition provision would increase the retained earnings reported on its balance sheet by the applicable portion of its CECL transitional amount, i.e., 75
percent of its CECL transitional amount during the first year of the transition period, 50 percent of its CECL transitional amount during the second year of the transition period, and 25 percent of its CECL
transitional amount during the third year of the transition period. A bank electing the 2020 CECL
rule transition provision would increase the retained earnings reported on its balance sheet by the applicable portion of its modified CECL
transitional amount, i.e., 100 percent of its modified CECL transitional amount during the first and second years of the transition period, 75 percent of its CECL modified transitional amount during the third year of the transition period, 50 percent of its modified CECL transitional amount during the fourth year of the transition period, and 25 percent of its CECL transitional amount during the fifth year of the transition period.
23 Thus,
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