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Regulatory Capital Phase-in for CECLRegulatory Capital Phase-in for CECL

DISCLAIMER: This article and accompanying example is intended to solely be a reference and resource to enhance CECL understanding. This information presented does not represent official supervisory policy.

On Feb, 14, 2019, the Federal Reserve System, the  Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency adopted a joint final rule for an optional phase-in period of three years for banks to absorb the impact to regulatory capital of implementing the new Current Expected Credit Loss (CECL) standard.

The regulatory agencies’ final rule was effective as of April 1, 2019. It includes:

  • Provide banking organizations with the option to phase-in, over a three-year period beginning from its CECL effective date, any “day-one” potential adverse effects on regulatory capital stemming from the accounting changes. (See example below.)
  • Revise the capital rule to identify which credit loss allowances under the new accounting standard are eligible for inclusion in a firm’s regulatory capital.
  • Incorporate the term “adjusted allowance for credit losses” (AACL) in the capital rule.
  • Revise the regulatory capital definition of carrying value for available-for-sale (AFS) debt securities and purchased credit-deteriorated (PCD) assets.
  • Revise affected disclosure requirements for banking organizations.
  • Clarify when CECL-related figures should be included in stress testing.

CECL Transitional Amounts

The purpose of the optional CECL transition provision is to phase in the day-one effect on banking organization’s capital ratios over a three-year period. The provision was in response to the potential difficulties of capital planning amid uncertainty about the economic environment at the time of CECL adoption.  CECL transitional amounts are based on balance sheet amounts that reflect the difference between a banking organization’s pre- and post-CECL amounts of retained earnings, deferred tax assets, and allowances for credit losses.


  • A firm has a CECL effective date of January 1, 2020, and a 21% tax rate.
  • Pre-CECL (Dec. 31, 2019), the firm has $10 million in retained earnings and $1 million in its allowance for loan lease losses (ALLL).  Post-CECL (Jan. 1, 2020), the firm has $1.2 million in its allowance for credit losses (ACL).
  • The firm would record an increase to ACL of $200,000, reflecting an offsetting increase in temporary difference deferred tax assets (DTAs) of $42,000, and a reduction in retained earnings of $158,000.
  • When reporting the regulatory capital schedule for the FFIEC Call Reports, for each quarterly period of the first year of the 2020 transition period, the firm would increase retained earnings and average total consolidated assets by $118,500, decrease temporary difference DTAs by $31,500, and decrease ACL by $150,000.
  • For years two and three, regulatory capital schedules would continue to be adjusted based on declining amounts (25% each year.)

In thousands

Transitional amounts

Transitional amounts applicable during each year of the transition period

Year 1 75%

Year 2 50%

Year 3 25%

Increase retained earnings and average total consolidated assets by the CECL transitional amount





Decrease temporary difference DTAs by the DTA transitional amount





Decrease AACL by the ACL transitional amount





On March 31, 2020,  the regulatory agencies’ issued a joint statement to clarify the interaction between the Revised Transition of the Current Expected Credit Losses Methodology for Allowances interim final rule (CECL IFR) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for purposes of regulatory capital requirements. Institutions now have an additional options to the previous optional 3-year capital phase-in, mentioned above, with a 5-year capital phase-in or to delay the CECL implementation.

The CECL IFR provides banking organizations that are required (as of January 1, 2020) to adopt CECL for accounting purposes under U.S. GAAP during 2020 an option to delay an estimate of CECL's impact on regulatory capital. The capital relief in the CECL IFR is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period. The cumulative difference at the end of the second year of the transition period is then phased in to regulatory capital over a three-year transition period. In this way, the CECL IFR gradually phases in the full effect of CECL on regulatory capital, providing a five-year transition period. Attached is an interactive spreadsheet to illustrate this option.

ATR_CECL Transition Examples

Note:  No banking organization is required to comply with CECL during the statutory relief period in the CARES Act, including banking organizations that otherwise would be required to adopt CECL in 2020 under U.S. GAAP. Such banking organizations may delay compliance with CECL until the statutory relief period expires. Banking organizations that elect to use the statutory relief may also elect the regulatory capital relief provided under the CECL IFR after the expiration of the statutory relief period. Refer to “Ask the Regulators” webinar for more detail analysis.