Authored by Andrew Cross

Three federal bank regulatory agencies – the FRB, FDIC, and OCC – today announced two COVID-19 related actions to support the U.S. economy and allow banking organizations to continue to lending to households and businesses:

• Allow early adoption of the “standardized approach for measuring counterparty credit risk,” or “SA-CCR,” which is a new way for banking organizations to measure counterparty credit risk, in pertinent part, from derivatives; and
• Provide certain banks with an additional two years to transition to the new “current expected credit loss,” or “CECL,” an accounting standard that is used for purposes of determining how much regulatory capital a bank has to set aside.

This blog post provides additional information about these announcements.

The SA-CCR methodology may provide certain banking organizations (typically, larger and more sophisticated banks) with a more risk-sensitive tool to measure derivatives-related counterparty risk. A more precise counterparty risk management methodology may make additional assets available for lending and related banking activity.

Additionally, the CECL accounting standard requires some banking organizations to consider current and future expected economic conditions to estimate credit loss allowances for purposes of determining how much regulatory capital a bank has to set aside.  The agencies issued an interim final rule that will allow banks subject to CECL to take an additional two-years to come into compliance with the accounting standard, particularly in light of the uncertainty surrounding COVID-19 related economic conditions.  The agencies noted that this extension is in addition to the three-year transition period that is already in place.

Additional information about these actions can be found here.