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NCUA Chairman Todd M. Harper Statement on the Final Rule on the Phase-in of the Day-One Capital Adjustments Under CECL

June 2021
NCUA Chairman Todd M. Harper Statement on the Final Rule on the Phase-in of the Day-One Capital Adjustments Under CECL
Todd M. Harper

NCUA Chairman Todd M. Harper

As Prepared for Delivery on June 24, 2021

Thank you, Alison and Ariel, for your efforts in preparing and presenting this final rule before the NCUA Board to phase in the day-one capital adjustment under the Financial Accounting Standards Board’s current expected credit losses methodology, also known as CECL. And, thank you Joy for joining us to answer any questions. This subject is highly technical and complex, and this final rule is a testament to staff expertise and effort.

When this rule was first proposed last July, I said earlier recognition of credit losses was a good thing. I still believe that. Indeed, as we have moved through the pandemic’s economic fallout, many credit unions have increased their reserves in anticipation of coming losses. That transparency and management action is prudent.

Nevertheless, implementing the CECL accounting standards should not prevent credit unions from serving their members and communities because they cannot manage their capital levels appropriately. That is why this rule before us today is so important.

Similar to a regulation already adopted by federal banking agencies, this final rule is tailored to temporarily mitigate the initial impact of CECL’s adoption by allowing a covered federally insured credit union to phase in the day-one effects on its net worth ratio over a three-year period under the NCUA’s prompt corrective action standards.

This phase-in will provide credit unions time to adjust to the change and grow capital organically without disrupting their ability to serve their members. Additionally, this change will provide credit unions with a measure of regulatory relief while still requiring them to account for the methodology for other purposes, such as in the Call Reports they file with the NCUA.

Also, under this final rule and consistent with the Federal Credit Union Act, federally insured credit unions with less than $10 million in assets would no longer be required to determine their charges for loan losses under generally accepted accounting principles. Instead, these credit unions can use any reasonable reserve methodology, if it adequately covers known and probable loan losses. The final rule also clarifies that federally insured, state-chartered credit unions with less than $10 million in assets, required by state law to comply with GAAP, are eligible for the transition phase-in.

As in the proposed rule, the phase-in, in the final rule, would only apply to those federally insured credit unions that adopt CECL for the fiscal years beginning on or after December 15, 2022, the deadline established by the Financial Accounting Standards Board for CECL’s implementation. Credit unions deciding to adopt CECL for the fiscal years before that date would not be eligible for the phase-in.

In sum, this final rule is a good first step in supporting credit unions as they make the transition to the CECL methodology. But, we still have more work to do. In particular, the NCUA must develop a simplified CECL spreadsheet for smaller credit unions. And, we need to create training materials for and issue more guidance to credit unions as we get closer to the implementation deadline. This work will facilitate the ability of all covered credit unions to comply with the CECL accounting standard in the months ahead.

On that point, I do have one question for you, Alison. What is the current expected timing for us to develop simplified CECL workbooks, create additional educational materials, and deliver training on CECL compliance?

Thank you again, Alison, Ariel, and Joy. That concludes my remarks. I now recognize Vice Chairman Hauptman.

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