25 Feb CECL Impact for CCAR Filers
CECL Impacts and Wholesale Risks Reflected in New FR Y-14A and Schedules ‘H’ Require New Data Connections and Collections
CECL Adoption’s Impact on CCAR Reporting ― Introducing FR Y-14A: Collection of Supplemental CECL Information
As financial institutions across the U.S. banking landscape begin to adopt CECL (Current Expected Credit Loss) requirements, an unintended consequence has emerged ― the Federal Reserve now requires ECL (expected credit loss) calculations to be disclosed in stress-testing scenarios.
ECL in the Stress-Test Cycle
The credit crisis revealed the shortcomings of U.S. GAAP that restricted the ability to record credit losses based upon the incurred loss model. This led to harmful delays in recognition of credit losses on loans and resulted in taking loan loss allowances that were far too late, contributing to the cascading effects of rapid devaluation of loan assets. To resolve this shortcoming in U.S. GAAP, the FASB issued ASU 2016-13 Financial Instruments – Credit Losses that recognizes ECLs upon the origination or acquisition of a financial asset. The inclusion of ECL in CCAR adds even more complexity to the stress-test models banks utilize to produce CCAR/DFAST reporting.
Enter FR Y-14A: Collection of Supplemental CECL Information
BHCs with more than $100bn in total assets that must provide CCAR (FR Y-14 Monthly, Quarterly and Annual) reporting now must incorporate a new schedule for Collection of Supplemental CECL Information. In conjunction with its continual monitoring of regulatory developments, AxiomSL’s regulatory analyst team has examined this new requirement that sets the baseline for the Federal Reserve’s disclosure requirements. FR Y-14A takes CECL implementation a step further requiring the U.S. banking community to report the following:
- The first quarter of projected data in which a firm incorporates CECL
- The impact of the CECL transition provision on certain regulatory capital components
- The cumulative-effect adjustment for changes in the allowance for credit losses
- Allowances for credit losses recognized upon the acquisition of purchased-credit-deteriorated (PCD) assets
- Initial effect of CECL methodology on loans and leases and held-to-maturity (HTM) debt securities
- Total allowance for credit losses
- Allowance for credit losses on loans and leases held for investment
- Allowance for credit losses on debt securities
Schedule FR Y-14A is now available from AxiomSL. The regulatory reporting team is prepared to help CCAR filers develop the CECL baseline required by the Federal Reserve.
CCAR Paints A More Complete Picture of Wholesale Risks ― Introducing Schedules H.3 and H.4
Wholesale risk, a familiar reporting requirement for CCAR filers, occurs across a variety of asset classes including sovereigns, financial institutions, corporates, commercial real estate, small to medium enterprises, and funds. However, filers must now absorb the Federal Reserve’s new requirement to link corporate and commercial real estate exposures to a specific line of business (LOB) and report clear definitions of risk ratings.
Enter Schedule H.3 ― Connecting Lines of Business
The Federal Reserve’s new Schedule H.3 requires filers to report a name and description of each LOB. In addition, Schedule H.3 links LOB information to the wholesale exposures reported on current schedules H.1 (corporate) and H.2 (commercial real estate).
In essence, the combination of Schedules H.3, H.2, and H.1 provides the Federal Reserve with a more complete picture of wholesale risks by each major LOB regarding corporate and commercial real estate asset classes.
Enter Schedule H.4 ― Risky Reporting
In addition, the new Schedule H.4 provides the Federal Reserve with a deeper look at the filer’s internal risk ratings by obligor. It connects data sets reported on Schedules H.1 and H.2 and adds a description of the internal risk rating and the rating itself, on a per-obligor basis.
The combination of Schedules H.1, H.2, H3 and H.4 presents a more complete picture of the wholesale risks carried by a financial institution on a quarterly basis. For the first time, these schedules will provide a consistent view of wholesale exposures by line of business with clear definitions of the risk ratings.
AxiomSL is prepared to facilitate CCAR filers compliance with the combined Schedules H.1, H.2, H.3 and H.4 requirement.