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Federal Register / Vol. 86, No. 36 / Thursday, February 25, 2021 / Rules and Regulations uncorrected, this temporary double counting could result in a deposit insurance assessment rate for a large or highly complex bank that does not accurately reflect the banks risk to the DIF, all else equal.
In the following simplified, stylized example, illustrated in Table 1 below, consider a hypothetical large bank that has a CECL effective date of January 1, 2020, and elects a five-year transition.27
On the closing balance sheet date immediately prior to adopting CECL
i.e., December 31, 2019, the electing bank has $1 million of ALLL and $10
million of Tier 1 capital. On the opening balance sheet date immediately after adopting CECL i.e., January 1, 2020, the electing bank has $1.2 million of allowances for credit losses, of which the entire $1.2 million qualifies as AACL for regulatory capital purposes and is attributable to the allowance for credit losses on loans and leases held for investment.28 The bank would recognize the adoption of CECL as of January 1, 2020, by recording an
increase in its allowances for credit losses, and in its AACL for regulatory capital purposes, of $200,000, with a reduction in beginning retained earnings of $200,000, which flows through and results in Tier 1 capital of $9.8 million. For each of the quarterly reporting periods in year 1 of the fiveyear transition period i.e., 2020, the electing bank would increase the retained earnings reported on its balance sheet by $200,000 for purposes of calculating its regulatory capital ratios, resulting in an increase in its Tier 1 capital of $200,000 to $10 million, all else equal.29
In this example, in determining the hypothetical large banks deposit insurance assessment rate, the banks Tier 1 capital of $10 million would include the $200,000 addition to the banks reported retained earnings due to the CECL transition entirely attributable to the allowance for credit losses on loans and leases, and its reserves would equal $1.2 million, the entire amount of which is attributable to
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the allowance for credit losses on loans and leases held for investment. Its combined Tier 1 capital and reserves would equal $11.2 million $10 million plus $1.2 million, reflecting double counting of the $200,000 applicable portion of the banks CECL transitional amount attributable to the allowance for credit losses on loans and leases.30
Under the final rule, for purposes of calculating assessments for large or highly complex banks, the FDIC would subtract $200,000 from the denominator of financial measures that sum Tier 1
capital and reserves, since the amount of $200,000 is incorporated in both Tier 1 capital as the applicable portion of the CECL transitional amount in year one of the five-year transition period and reserves in the denominator. The banks adjusted Tier 1 capital and reserves would equal $11 million. The FDIC also would adjust the calculation of the loss severity measure by $200,000, as described below.

TABLE 1STYLIZED EXAMPLE 1 OF FIRST-QUARTER APPLICATION OF A FIVE-YEAR CECL TRANSITION IN CALCULATING
TIER 1 CAPITAL AND RESERVES FOR DEPOSIT INSURANCE ASSESSMENT PURPOSES
In thousands
Dec. 31, 2019

Reserves
Tier 1 Capital
Tier 1 Capital and Reserves absent final rule
Applicable Portion of the CECL Transitional Amount
Tier 1 Capital and Reserves under final rule

$1,000 ALLL
$10,000
$11,000

Jan. 1, 2020
$1,200 AACL.
$10,000.
$11,200.
$200.
$11,000.

1 This stylized example reflects the first-quarter application of a hypothetical bank that has adopted a five-year CECL transition under the 2020
CECL rule and assumes that the full amount of the CECL transitional amount is attributable to the allowance for credit losses on loans and leases. The example does not reflect any changes over the course of the first quarter of 2020 i.e., no changes in the amounts reported on the banks balance sheet between January 1 and March 31, 2020, the end of the reporting period for the first quarter. As a consequence, the banks modified CECL transitional amount as of March 31, 2020, equals its CECL transitional amount. This stylized example omits the effects of deferred tax assets, which are addressed in the agencies capital rule, the 2019 CECL rule, and the 2020 CECL rule.

The final rule amends the deposit insurance system applicable to large banks and highly complex banks only,
and does not affect regulatory capital or the regulatory capital relief provided under the 2019 CECL rule or 2020 CECL

27 This stylized example is included to illustrate the effect of the final rule and omits the effects of deferred tax assets on regulatory capital calculations, which are addressed in the agencies capital rule, the 2019 CECL rule, and the 2020 CECL
rule. The example reflects the first-quarter 2020
application by a hypothetical large bank with no purchased credit-deteriorated assets that has adopted the five-year CECL transition under the 2020 CECL rule and assumes that the full amount of the CECL transitional amount is attributable to the allowance for credit losses on loans and leases.
The example does not reflect any changes over the course of the first quarterly reporting period in year 1 i.e., no changes in the amounts reported on the banks balance sheet between January 1 and March 31, 2020, the end of the reporting period for the first quarter. As a consequence, the example banks modified CECL transitional amount as of March 31, 2020 equals its CECL transitional amount. See 12
CFR part 3 OCC; 12 CFR part 217 Board; 12 CFR
part 324 FDIC. See also 84 FR 4222 Feb. 14, 2019
and 85 FR 61577 Sept. 30, 2020.
28 While the CECL transitional amount is calculated using the difference between the closing
balance sheet amount of retained earnings for the fiscal year-end immediately prior to a banks adoption of CECL and the balance sheet amount of retained earnings as of the beginning of the fiscal year in which the bank adopts CECL, the FDIC
calculates financial measures used to determine deposit insurance assessment rates using data reported as of each quarter end.
29 Under the 2019 CECL rule, when calculating regulatory capital ratios during the first year of an electing banks CECL adoption date, the bank must phase in 25 percent of the transitional amounts. The bank would phase in an additional 25 percent of the transitional amounts over each of the next two years so that the bank would have phased in 75
percent of the day-one adverse effects of adopting CECL during year three. At the beginning of the fourth year, the bank would have completely reflected in regulatory capital the day-one effects of CECL. Under the 2020 CECL rule, the modified CECL transitional amount is calculated on a quarterly basis during the first two years of the transition period. See 12 CFR part 3 OCC; 12 CFR
part 217 Board; 12 CFR part 324 FDIC. See also
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84 FR 4222 Feb. 14, 2019 and 85 FR 61577 Sept.
30, 2020.
30 In this stylized example, the entirety of the CECL transitional amount is attributable to the allowance for credit losses on loans and leases and it equals the modified CECL transitional amount during the first quarter of the transition period. The applicable portion of the CECL transitional amounts is the amount that is double counted in certain financial measures used to determine deposit insurance assessment rates and that the FDIC will remove from those financial measures. However, CECL transitional amounts may also include amounts attributable to allowances for credit losses under CECL on HTM debt securities, other financial assets measured at amortized cost, and off-balance sheet credit exposures. Under the final rule, in determining a large or highly complex banks deposit insurance assessment rate, the FDIC will continue to include in Tier 1 capital the applicable portion of any CECL transitional amounts attributable to allowances for credit losses on items other than loans and leases held for investment.

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