[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Proposed Rules]
[Pages 49684-49690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19916]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 615, 620, 621, 628 and 630

RIN 3052-AD36


Implementation of the Current Expected Credit Losses Methodology 
for Allowances, Related Adjustments to the Tier 1/Tier 2 Capital Rule, 
and Conforming Amendments

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) is inviting 
public comment on a proposal to address changes to our capital and 
other regulations, including certain regulatory disclosure 
requirements, in response to recent changes in the U.S. generally 
accepted accounting principles (U.S. GAAP).

DATES: You may send us comments on or before November 22, 2019.

ADDRESSES: For accuracy and efficiency reasons, please submit comments 
by email or through the FCA's website. We do not accept comments 
submitted by facsimile (fax), as faxes are difficult for us to process 
in compliance with section 508 of the Rehabilitation Act. Please do not 
submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA Website: http://www.fca.gov. Click inside the ``I want 
to . . .'' field near the top of the page; select ``comment on a 
pending regulation'' from the dropdown menu; and click ``Go.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Barry F. Mardock, Acting Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or on our website at http://www.fca.gov. We will show 
your comments as submitted, but for technical reasons we may omit items 
such as logos and special characters. Identifying information that you 
provide, such as phone numbers and addresses, will be publicly 
available. However, we will attempt to remove email addresses to help 
reduce internet spam.
    To read comments online, go to www.fca.gov, click inside the ``I 
want to . . .'' field near the top of the page; select ``find comments 
on a pending regulation'' from the dropdown menu; and click ``Go.'' 
This will take you to the Comment Letters page where you can select the 
regulation for which you would like to read the public comments.

FOR FURTHER INFORMATION CONTACT:
Ryan Leist, Senior Accountant, Office of Regulatory Policy, (703) 883-
4223, TTY (703) 883-4056; or
Jeremy R. Edelstein, Associate Director, Finance and Capital Markets 
Team, Office of Regulatory Policy, (703) 883-4497, TTY (703) 883-4056; 
or
Jennifer Cohn, Senior Counsel, Office of General Counsel, (720) 213-
0440, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Objectives of the Proposed Rule
    B. Overview of Changes to U.S. Generally Accepted Accounting 
Principles
    C. Regulatory Capital
II. Description of the Proposed Rule
    A. Proposed Revisions to the Capital Rules To Reflect the Change 
in U.S. GAAP
    1. Introduction of Adjusted Allowances for Credit Losses as a 
Newly Defined Term
    2. Definition of Carrying Value
    i. Available-for-Sale Debt Securities
    ii. Purchased Credit Deteriorated Assets
    3. Additional Considerations
    B. Disclosures and Regulatory Reporting

[[Page 49685]]

    C. Conforming Changes
    D. Supervisory Guidance on the ACL
    E. Additional Request for Comment
III. Timeframe for Implementation
IV. Regulatory Flexibility Act

I. Introduction

A. Objectives of the Proposed Rule

    The objectives of the proposed rule are to:
     Ensure that the System's capital requirements, including 
certain regulatory disclosures, reflect the current expected credit 
losses methodology, which revises the accounting for credit losses 
under U.S. GAAP; and
     Ensure that conforming amendments to other regulations 
accurately reference credit losses.

B. Overview of Changes to U.S. Generally Accepted Accounting Principles

    In June 2016, the Financial Accounting Standards Board (FASB) 
issued Accounting Standards Update (ASU) No. 2016-13, Topic 326, 
Financial Instruments--Credit Losses,\1\ which revises the accounting 
for credit losses under U.S. GAAP. In pertinent part, ASU No. 2016-13:
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    \1\ ASU No. 2016-13 introduces ASC Topic 326, which covers 
measurement of credit losses on financial instruments and includes 
three subtopics: (i) Subtopic 10: Financial Instruments--Credit 
Losses--Overall; (ii) Subtopic 20: Financial Instruments--Credit 
Losses--Measured at Amortized Cost; and (iii) Subtopic 30: Financial 
Instruments--Credit Losses--Available-for-Sale Debt Securities.
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     Introduces the current expected credit losses methodology 
(CECL), which replaces the incurred loss methodology for financial 
assets measured at amortized cost;
     Introduces the term purchased credit deteriorated (PCD) 
assets, which replaces the term purchased credit impaired (PCI) assets;
     Modifies the treatment of credit losses on available-for-
sale (AFS) debt securities; and
     Requires certain disclosures of credit quality indicators 
by year of origination (or vintage). The new accounting standard for 
credit losses will apply to all System institutions.\2\
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    \2\ FCA regulation Sec.  628.2 defines System institution, for 
capital rule purposes, as a System bank, an association, Farm Credit 
Leasing Services Corporation, and any other FCA-chartered 
institution that we determine should be subject to our capital 
rules. FCA issued an Informational Memorandum on September 1, 2016, 
New Accounting Standard on Financial Instruments--Credit Losses, 
which provided initial information on CECL.
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    CECL differs from the incurred loss methodology in several key 
respects. CECL requires System institutions to recognize lifetime 
expected credit losses for financial assets measured at amortized cost, 
not just those credit losses that have been incurred as of the 
reporting date. CECL also requires the incorporation of reasonable and 
supportable forecasts in developing an estimate of lifetime expected 
credit losses, while maintaining the current requirement for System 
institutions to consider past events and current conditions. 
Furthermore, the probable threshold for recognition of allowances in 
accordance with the incurred loss methodology is removed under CECL. 
Estimating expected credit losses over the life of an asset under CECL, 
including consideration of reasonable and supportable forecasts, 
results in earlier recognition of credit losses than under the existing 
incurred loss methodology.
    In addition, CECL replaces multiple impairment approaches in 
existing U.S. GAAP. CECL allowances will cover a broader range of 
financial assets than allowance for loan losses (ALL) under the 
incurred loss methodology. Under the incurred loss methodology, in 
general, ALL covers credit losses on loans held for investment and 
lease financing receivables, with additional allowances for certain 
other extensions of credit and allowances for credit losses on certain 
off-balance sheet credit exposures (with the latter allowances 
presented as a liability).\3\ These exposures will be within the scope 
of CECL. In addition, CECL covers credit losses on held-to-maturity 
(HTM) debt securities.
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    \3\ ``Other extensions of credit'' includes trade and 
reinsurance receivables, and receivables that relate to repurchase 
agreements and securities lending agreements. ``Off-balance sheet 
credit exposures'' includes off-balance sheet credit exposures not 
accounted for as insurance, such as loan commitments, standby 
letters of credit, and financial guarantees. We note that credit 
losses for off-balance sheet credit exposures that are 
unconditionally cancellable by the issuer are not recognized under 
CECL.
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    As mentioned above, ASU No. 2016-13 also introduces PCD assets as a 
replacement for PCI assets. The PCD asset definition covers a broader 
range of assets than the PCI asset definition. CECL requires System 
institutions to estimate and record credit loss allowances for a PCD 
asset at the time of purchase. The credit loss allowance is then added 
to the purchase price to determine the amortized cost basis of the 
asset for financial reporting purposes. Post-acquisition increases in 
credit loss allowances on PCD assets will be established through a 
charge to earnings. This is different from the current treatment of PCI 
assets, for which System institutions are not permitted to estimate and 
recognize credit loss allowances at the time of purchase. Rather, in 
general, credit loss allowances for PCI assets are estimated after the 
purchase only if there is deterioration in the expected cash flows from 
the assets.\4\
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    \4\ The System currently holds limited PCI assets, which have 
generally been acquired through business combinations. We do not 
believe the amount of PCD assets in the System after the adoption of 
CECL will be materially different.
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    ASU No. 2016-13 also introduces new requirements for Available-For-
Sale (AFS) debt securities. The new accounting standard requires that a 
System institution recognize credit losses on individual AFS debt 
securities through credit loss allowances, rather than through direct 
write-downs, as is currently required under U.S. GAAP. AFS debt 
securities will continue to be measured at fair value, with changes in 
fair value not related to credit losses recognized in other 
comprehensive income. Credit loss allowances on an AFS debt security 
are limited to the amount by which the security's fair value is less 
than its amortized cost.
    Upon adoption of CECL, a System institution will record a one-time 
adjustment to its credit loss allowances as of the beginning of its 
fiscal year of adoption equal to the difference, if any, between the 
amount of credit loss allowances required under the incurred loss 
methodology and the amount of credit loss allowances required under 
CECL. Except for PCD assets, the adjustment to credit loss allowances 
would be recognized with offsetting entries to deferred tax assets 
(DTAs), if appropriate, and to the fiscal year's beginning retained 
earnings.
    The effective date of ASU No. 2016-13 varies for different banking 
organizations. For banking organizations that are public business 
entities (PBE) but not SEC filers (as defined in U.S. GAAP),\5\ ASU No. 
2016-13 will become effective for the first fiscal year beginning after 
December 15, 2020, including interim periods within that fiscal year. 
The Federal Farm Credit Banks Funding Corporation (Funding Corporation) 
meets the definition of a

[[Page 49686]]

PBE,\6\ and it is our understanding that all System institutions will 
implement the new standard for purposes of System-wide combined 
financial statements for the quarter ending March 31, 2021.
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    \5\ A public business entity (PBE) that is not an SEC filer 
includes: (1) An entity that has issued securities that are traded, 
listed, or quoted on an over-the-counter market, or (2) an entity 
that has issued one or more securities that are not subject to 
contractual restrictions on transfer and is required by law, 
contract, or regulation to prepare U.S. GAAP financial statements 
(including footnotes) and make them publicly available periodically. 
For further information on the definition of a PBE, refer to ASU No. 
2013-12, Definition of a Public Business Entity, issued in December 
2013.
    \6\ The Funding Corporation is the fiscal agent and disclosure 
agent for the System. The Funding Corporation is responsible for 
issuing and marketing debt securities to finance the System's loans, 
leases, and operations and for preparing and producing the System's 
financial results.
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C. Regulatory Capital

    Changes necessitated by CECL to a System institution's retained 
earnings, DTAs, and allowances will affect its regulatory capital 
ratios.\7\ Specifically, retained earnings are a key component of a 
System institution's common equity tier 1 (CET1) capital. An increase 
in a System institution's allowances, including those estimated under 
CECL, generally will reduce the institution's earnings or retained 
earnings, and therefore its CET1 capital.\8\
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    \7\ These capital ratios are specified in FCA regulation Sec.  
628.10.
    \8\ However, allowances recognized on PCD assets upon adoption 
of CECL and upon later purchases of PCD assets generally would not 
reduce the System institution's earnings, retained earnings, or CET1 
capital.
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    Depending on the nature of the difference, DTAs arising from 
temporary differences (temporary difference DTAs) are included in a 
System's institution's risk-weighted assets or are deducted from CET1 
capital.\9\ Increases in allowances generally give rise to increases in 
temporary difference DTAs that will partially offset the reduction in 
earnings or retained earnings.\10\ Under Sec.  628.20(d)(3), the ALL is 
included in a System institution's tier 2 capital up to 1.25 percent of 
its standardized total risk-weighted assets not including any amount of 
the ALL.\11\
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    \9\ DTAs arising from temporary differences in relation to net 
operating loss carrybacks are risk-weighted at 100 percent under 
Sec.  628.32(l)(3). DTAs that arise from net operating loss and tax 
credit carryforwards, net of any related valuation allowances and 
net of deferred tax liabilities in accordance with Sec.  628.22(e), 
are deducted from CET1 capital under Sec.  628.22(a)(3). All other 
DTAs are risk-weighted at 100 percent under Sec.  628.32(l)(5). DTAs 
are immaterial at most System institutions.
    \10\ See Accounting Standards Codification Topic 740, ``Income 
Taxes.''
    \11\ Under Sec.  628.2, any amount of ALL greater than the 1.25 
percent limit is deducted from standardized total risk-weighted 
assets.
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II. Description of the Proposed Rule

    To address the forthcoming implementation of changes to U.S. GAAP 
resulting from the FASB's issuance of ASU No. 2016-13 and to improve 
consistency between our capital rules and U.S. GAAP, we propose to 
amend our capital rules to identify which credit loss allowances under 
the new accounting standard are eligible for inclusion in a System 
institution's regulatory capital.\12\ In particular, FCA is proposing 
to add adjusted allowances for credit losses (AACL) as a newly defined 
term in the capital rules. AACL would include credit loss allowances 
related to financial assets, except for allowances for PCD assets and 
AFS debt securities.\13\ AACL would be eligible for inclusion in a 
System institution's tier 2 capital subject to the current limit for 
including ALL in tier 2 capital under the capital rules.
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    \12\ Note that Sec.  621.3 requires institutions to prepare 
financial statements in accordance with GAAP, except as otherwise 
directed by statutory and regulatory requirements.
    \13\ This exclusion of credit loss allowances on PCD assets and 
AFS debt securities is what differentiates AACL from the term 
allowance for credit losses (ACL), which is used by the FASB in ASU 
2016-13 and which applies to both financial assets and AFS debt 
securities. Consistent with the proposal and as described in the 
following sections, the AACL definition includes only those 
allowances that have been charged against earnings or retained 
earnings.
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    The proposal also would provide a separate capital treatment for 
allowances associated with AFS debt securities and PCD assets that 
would apply to System institutions upon adoption of ASU 2016-13; revise 
regulatory disclosure requirements that would apply to System banks 
following their adoption of CECL; \14\ and make conforming amendments 
to the FCA's other regulations that refer to credit loss allowances to 
reflect the implementation of ASU No. 2016-13.
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    \14\ Section 628.63 requires System banks to disclose items such 
as capital structure, capital adequacy, credit risk, and credit risk 
mitigation.
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    Our capital rules are similar to the standardized approach capital 
rules that the Federal banking regulatory agencies (FBRAs) \15\ adopted 
for the banking organizations they regulate, while taking into account 
the cooperative structure and the organization of the System. The FBRAs 
published a CECL rule in February 2019.\16\ Our proposal is very 
similar to the FBRAs' rule.\17\
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    \15\ The FBRAs are the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, and 
the Federal Deposit Insurance Corporation.
    \16\ 84 FR 4222 (February 14, 2019).
    \17\ FCA staff met with System representatives during the 
development of this rule to seek their input on certain issues. The 
questions discussed were similar to the questions asked in the 
preamble to the FBRA's proposed CECL rule. (83 FR 22312, May 14, 
2018). We considered this input in developing this proposal.
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A. Proposed Revisions to the Capital Rules To Reflect the Change in 
U.S. GAAP

1. Introduction of Adjusted Allowances for Credit Losses as a Newly 
Defined Term
    FCA is proposing to revise the capital rules to reflect the revised 
accounting standard for credit losses under U.S. GAAP as it relates to 
System institutions' calculation of regulatory capital ratios. Under 
the proposal, the new capital term AACL, rather than ALL, would apply 
to all System institutions. Consistent with the treatment of ALL under 
FCA's capital rules, amounts of AACL would be eligible for inclusion in 
an institution's tier 2 capital up to 1.25 percent of the institution's 
standardized total risk-weighted assets not including any amount of the 
AACL.
    CECL allowances cover a broader range of financial assets than ALL 
under the incurred loss methodology. Under the capital rules, ALL 
includes valuation allowances that have been established through a 
charge against earnings to cover estimated credit losses on loans or 
other extensions of credit as determined in accordance with U.S. GAAP. 
Under CECL, credit loss allowances represent an accounting valuation 
account, measured as the difference between the financial assets' 
amortized cost basis and the amount expected to be collected on the 
financial assets (i.e., lifetime credit losses). Thus, AACL would 
include allowances for expected credit losses on HTM debt securities 
and lessors' net investments in leases that have been established to 
reduce these assets to amounts expected to be collected, as determined 
in accordance with U.S. GAAP. AACL also would include allowances for 
expected credit losses on off-balance sheet credit exposures not 
accounted for as insurance, as determined in accordance with U.S. GAAP. 
As described below, however, credit loss allowances related to AFS debt 
securities and PCD assets would not be included in the definition of 
AACL.
2. Definition of Carrying Value
    FCA is proposing to revise the regulatory definition of carrying 
value under the capital rules to provide that, for all assets other 
than AFS debt securities and PCD assets, the carrying value is not 
reduced by any associated credit loss allowance.
i. Available-for-Sale Debt Securities
    Current accounting standards require a System institution to make 
an individual assessment of each of its AFS

[[Page 49687]]

debt securities and take a direct write-down for credit losses when 
such a security is other-than-temporarily impaired. The amount of the 
write-down is charged against earnings, which reduces CET1 capital and 
also results in a reduction in the same amount of the carrying value of 
the AFS debt security. ASU No. 2016-13 revises the accounting for 
credit impairment of AFS debt securities by requiring System 
institutions to determine whether a decline in fair value below an AFS 
debt security's amortized cost resulted from a credit loss, and to 
record any such credit impairment through earnings with a corresponding 
allowance. Similar to the current regulatory treatment of credit-
related losses for other-than-temporary impairment, under the proposal, 
all credit losses recognized on AFS debt securities would flow through 
to CET1 capital and reduce the carrying value of the AFS debt security. 
Since the carrying value of an AFS debt security is its fair value, 
which would reflect any credit impairment, credit loss allowances for 
AFS debt securities required under the new accounting standard would 
not be eligible for inclusion in a System institution's tier 2 capital.
ii. Purchased Credit Deteriorated Assets
    Under the new accounting standard, PCD assets are acquired 
individual financial assets (or acquired groups of financial assets 
with shared risk characteristics) that, as of the date of acquisition 
and as determined by an acquirer's assessment, have experienced a more-
than-insignificant deterioration in credit quality since origination. 
The new accounting standard will require a System institution to 
estimate expected credit losses that are embedded in the purchase price 
of a PCD asset and recognize these amounts as an allowance as of the 
date of acquisition. As such, the initial allowance amount for a PCD 
asset recorded on a System institution's balance sheet will not be 
established through a charge to earnings. Post-acquisition increases in 
allowances for PCD assets will be established through a charge against 
earnings.
    Including in tier 2 capital allowances that have not been charged 
against earnings would diminish the quality of regulatory capital. 
Accordingly, FCA is proposing to maintain the requirement that 
valuation allowances be charged against earnings in order to be 
eligible for inclusion in tier 2 capital. FCA is also clarifying that 
valuation allowances that are charged to retained earnings in 
accordance with U.S. GAAP (i.e., the allowances required at CECL 
adoption) are eligible for inclusion in tier 2 capital.
    As in the FBRAs' final rule, FCA is not proposing to allow System 
institutions to bifurcate PCD allowances to include post-acquisition 
allowances in the definition of AACL; we are concerned that a 
bifurcated approach could create undue complexity and burden for System 
institutions when determining the amount of credit loss allowances for 
PCD assets eligible for inclusion in tier 2 capital. In addition, 
System institutions have very little, if any, allowances for PCI assets 
and, as discussed above, this will not change with the change to PCD 
assets. Therefore, the proposal excludes all PCD allowances from being 
included in tier 2 capital.\18\ The proposal also revises the 
definition of carrying value such that for PCD assets the carrying 
value is calculated net of allowances. This treatment of PCD assets 
would, in effect, reduce a System institution's standardized total 
risk-weighted assets, similar to the proposed treatment for credit loss 
allowances for AFS debt securities.
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    \18\ This proposal excludes both initial PCD allowances and 
post-acquisition PCD allowances from being included in tier 2 
capital. As noted above, the initial allowance for a PCD asset will 
not be established through a charge to earnings (the allowance is 
estimated on the date of acquisition). However, post-acquisition 
increases in allowances for PCD assets are established through a 
charge against earnings.
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3. Additional Considerations
    As in the FBRAs' final rule, FCA is not proposing to change the 
limit of 1.25 percent of risk-weighted assets governing the amount of 
AACL eligible for inclusion in tier 2 capital. Should this limit be 
finalized as proposed, FCA intends to monitor the effects of this limit 
on regulatory capital and System institution lending practices. This 
ongoing monitoring will include the review of data, including data 
provided by System institutions, and will assist FCA in determining 
whether a further change to the capital rules' treatment of AACL might 
be warranted. To the extent FCA determines that further revisions to 
the capital rules are necessary, we would seek comment through a 
separate proposal.
    In addition, unlike the FBRAs, FCA is not proposing a phase-in of 
the day-one effects of CECL on regulatory capital ratios. The FBRAs 
included an optional three-year transition period for banking 
organizations to reduce the potential day-one adverse effects that CECL 
may have on a banking organization's regulatory capital ratios. The 
FBRAs included this transition period because of concerns that some 
banking organizations might face difficulties in capital planning 
because of uncertainty about the economic environment at the time of 
CECL adoption.\19\
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    \19\ CECL requires consideration of current and future expected 
economic conditions to estimate allowances. To an extent, these 
conditions will not be known until closer to an institution's CECL 
adoption date.
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    The FBRAs will use a banking organization's regulatory capital 
ratios, as adjusted by the transition provision, to determine whether 
the organization is in compliance with its regulatory capital 
requirements (including capital buffer and prompt corrective action 
(PCA) requirements). However, the FBRAs will continue to examine 
banking organizations' credit loss estimates and allowance balances 
through the supervisory process regardless of whether they have elected 
to use the transition provision. In addition, the FBRAs may examine 
whether banking organizations will have adequate amounts of capital at 
the expiration of the transition provision period.\20\
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    \20\ 84 FR 4229 (February 14, 2019).
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    We are not proposing a transition period for the following reasons.
    First, a transition provision appears to be unnecessary for any 
System institution because, even without a transition period, they are 
all expected to be sufficiently capitalized to absorb the day one 
impact of CECL for the purpose of complying with regulatory capital 
requirements. In particular, if the allowances as estimated under CECL 
increase, CET1 capital (including retained earnings) will decrease and 
tier 2 capital will increase; \21\ we believe total capital will be 
largely unchanged at the majority of System institutions. Even though a 
transition period like the FBRAs adopted would not affect the FCA's 
supervisory oversight, we do not anticipate the impacts of CECL 
prompting any increase in supervisory concern or response. Moreover, 
the capital ratios of all System institutions--CET1; Tier 1; Total 
Capital; and Tier 1 Leverage--are expected to remain above the 
regulatory minimums and buffers after the implementation of CECL, even 
without a transition period. An institution's ability to provide loans 
and related services without a transition provision would be hindered 
only if the

[[Page 49688]]

institution's capital measures would fall below its regulatory capital 
requirements without the transition provision.\22\
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    \21\ As of March 31, 2019, the combined System-wide allowance 
for loan losses and reserve for losses on unfunded commitments as a 
percentage of risk weighted assets was 0.57 percent. As mentioned 
above, under revised Sec.  628.20(d)(3), the AACL would be included 
in a System institution's tier 2 capital up to 1.25 percent of its 
standardized total risk-weighted assets not including any amount of 
the AACL.
    \22\ Unlike the banking organizations regulated by the FBRAs, 
System institutions have no PCA requirements and therefore have no 
concerns about triggering such requirements.
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    Second, we believe either an optional or a mandatory transition 
period would lead to unnecessary complexity and operational burden that 
is not warranted in light of our belief that a transition period is not 
needed. An optional transition period, like that adopted by the FBRAs, 
could be difficult to implement and maintain for System institutions in 
at least two districts that make use of common standardized 
applications for computing and reporting regulatory capital. A 
transition period utilized by some institutions in such districts but 
not by others would appear to complicate supporting the common 
reporting platforms for those institutions. In addition, allowing an 
optional transition period would create a lack of comparability among 
System institutions' capital levels.
    A mandatory transition period might not be wanted by institutions 
that already have plans to absorb the day-one impact of CECL and have 
incurred sunk costs in making changes to processes for calculating and 
reporting regulatory capital ratios for FCA Uniform Reports of 
Financial Condition and Performance (Call Reports) and shareholder 
reporting.
    Closer to the adoption of CECL, and in the unlikely event that its 
day-one impact threatens regulatory capital compliance or patronage 
practices, FCA may consider other options to reduce unanticipated 
impacts of the accounting change. The type of action would depend on 
the materiality of CECL's impact and how widespread the issue is 
throughout the System.
    We request comment on the following issues relative to a transition 
period:
    1. We invite comment on whether FCA should adopt a transition 
period for the day-one impact CECL may have on an institution's 
regulatory capital ratios. If you believe we should adopt a transition 
period, please explain whether you believe it should be mandatory or 
optional, and please address the reasons we have discussed for not 
proposing a transition period. Please provide analysis to support your 
position.
    2. We invite comment on alternatives to a transition period that 
might accommodate institutions in their implementation of the CECL 
requirements. Please explain what these alternatives are and why they 
would be necessary. Please explain why our reasons for not proposing a 
transition period would not apply to these alternatives. Please provide 
analysis to support your position.

B. Disclosures and Regulatory Reporting

    Under the proposed rule, System banks would be required to update 
their disclosures required under Sec.  628.63 to reflect the adoption 
of CECL. For example, System banks would be required to disclose AACL 
instead of ALL after adoption.
    In addition, to reflect changes in U.S. GAAP, FCA anticipates 
revising the Call Reports as part of its annual review process. These 
revisions would specify the affected line items in the capital 
schedules and the newly defined term AACL. In addition, FCA intends to 
update instructions for all affected Call Report schedule references to 
ALL. If we adopt this rule as proposed, we expect to make these changes 
for the March 31, 2021 reporting period.

C. Conforming Changes

    A number of existing FCA regulations outside of Part 628 refer to 
ALL or to ``loan loss.'' ASU No. 2016-13 removes impairment approaches 
and related terminology, including replacing the term ALL with 
allowance for credit losses (ACL). The proposed rule would replace the 
references to ALL or ``loan loss'' in our regulations with references 
to ACL or ``credit loss,'' as appropriate. In addition, several 
regulations that refer to ``allowance for losses'' more appropriately 
should refer to ACL.
    Both the part 620 regulations governing the contents of the annual 
report to shareholders and the part 630 regulations governing the 
contents of the annual report to investors require that the discussion 
and analysis of risk exposures analyze the allowance for loan losses. 
The proposal would amend the analysis requirement for consistency with 
ASU No. 2016-13, which requires an analysis of the allowance for credit 
losses by year of origination (vintage year) and the allowance be 
supported by reasonable and supportable forecasts. The proposal would 
also replace terms in the requirement that references ``loan loss'' 
with references to ``credit loss,'' as appropriate.
    In the capital rules codified at part 628, as well as in other 
regulations that refer to the capital rules, the proposal would replace 
references to ALL with AACL. In the capital disclosures at Sec.  
628.63, references to ``probable loan losses'' and ``loan losses'' 
would be updated with ACL or AACL, as applicable.
    The proposed rule would make conforming changes in regulations in 
the following parts:

 Part 611--Organization
 Part 615--Funding and Fiscal Affairs, Loan Policies and 
Operations, and Funding Operations
 Part 620--Disclosure to Shareholders
 Part 621--Accounting and Reporting Requirements
 Part 628--Capital Adequacy of System Institutions
 Part 630--Disclosure to Investors in System-Wide and 
Consolidated Bank Debt Obligations of the Farm Credit System.

D. Supervisory Guidance on the ACL

    If this rule is adopted, we expect to issue supervisory guidance on 
the ACL. Until that time, many concepts, processes, and practices 
detailed in existing supervisory guidance on the ALL would continue to 
remain relevant under CECL. Relevant guidance includes, but is not 
limited to, information related to management's responsibility for the 
allowance estimation process, the board of directors' responsibility 
for overseeing management's process, and the need for institutions to 
appropriately support and document their allowance estimates.\23\ Until 
new guidance is issued, institutions should consider the relevant 
sections of existing ALL guidance in their implementation of the new 
accounting standard.
---------------------------------------------------------------------------

    \23\ Existing supervisory guidance includes: FCA Bookletter 49, 
Adequacy of Farm Credit System Institutions' Allowance for Loan 
Losses and Risk Funds, April 26, 2004; FCA Informational Memorandum, 
Computer-Based Model Validation Expectations, June 17, 2002; FCA 
Informational Memorandum, Allowance for Loan Losses, June 30, 2009; 
and FCA Exam Manual, Allowance for Loan Losses, November 17, 2015.
---------------------------------------------------------------------------

E. Additional Request for Comment

    FCA seeks comment on all aspects of the proposal. Comments are 
requested about the potential impact, if any, of the proposal in 
ensuring the safety and soundness of individual System institutions as 
well as on the stability of the Farm Credit System.

III. Timeframe for Implementation

    We intend the effective date of the final rule to be January 1, 
2021. As mentioned above, the effective date of ASU No. 2016-13 will 
become effective for the Funding Corporation for the first fiscal year 
beginning after December 15, 2020, including interim periods within 
that fiscal year, and System institutions will implement the new 
standard for purposes of System-wide combined financial statements for 
the Call Report quarter ending March 21, 2021.

[[Page 49689]]

IV. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
affiliated associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.

Lists of Subjects

12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

12 CFR Part 620

    Accounting, Agriculture, Banks, banking, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 621

    Accounting, Agriculture, Banks, banking, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 628

    Accounting, Agriculture, Banks, banking, Capital, Government 
securities, Investments, Rural areas.

12 CFR Part 630

    Accounting, Agriculture, Banks, banking, Organization and functions 
(Government agencies), Reporting and recordkeeping requirements, Rural 
areas.

    For the reasons stated in the preamble, the Farm Credit 
Administration proposes to amend parts 611, 615, 620, 621, 628, and 630 
of chapter VI, title 12 of the Code of Federal Regulations as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 is revised to read as follows:

    Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2, 
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 4.3A, 4.12, 
4.12A, 4.15, 4.20, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25, 7.0-
7.3, 7.6-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011, 
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121, 
2122, 2123, 2124, 2128, 2129, 2130, 2154a, 2183, 2184, 2203, 2208, 
2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279a-3, 2279b-
2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 
Stat. 1568, 1638 (12 U.S.C. 2071 note and Sec.  2202 note).


Sec.  611.515  [Amended]

0
2. Amend Sec.  611.515 paragraph (b)(6)(ii)(E) by removing the word 
``loan'' and adding in its place the word ``credit''.


Sec.  611.1122  [Amended]

0
3. Amend Sec.  611.1122 by:
0
a. Removing in paragraph (e)(6)(iii), the word ``loan'' and adding in 
its place the word ``credit''; and
0
b. Removing in paragraph (e)(10), the words ``loan losses'' and adding 
in its place the words ``credit losses'' both places it appears.


Sec.  611.1130  [Amended]

0
4. Amend Sec.  611.1130 paragraph (b)(4)(i) by removing the words 
``allowance for losses'' and adding in its place the words ``allowance 
for credit losses''.


Sec.  611.1223  [Amended]

0
5. Amend Sec.  611.1223 paragraph (c)(23)(ii) by removing the words 
``allowance for losses'' and adding in its place the words ``allowance 
for credit losses''.


Sec.  611.1250  [Amended]

0
6. Amend Sec.  611.1250 paragraph (b)(5)(i)(B) by removing the words 
``loan'' and adding in its place the words ``credit''.


Sec.  611.1255  [Amended]

0
7. Amend Sec.  611.1255 paragraph (b)(5)(i)(B) by removing the words 
``general allowance for losses'' and adding in its place the words 
``general allowance for credit losses''.

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

0
8. The authority citation for part 615 is revised to read as follows:

    Authority:  Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12 
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C. 
2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 
U.S.C. 78o-7 note).


Sec.  615.5050  [Amended]

0
9. Amend Sec.  615.5050 by:
0
a. Removing in paragraph (c)(1), the words ``allowance for loan 
losses'' and adding in its place the words ``allowance for credit 
losses''; and
0
b. Removing in paragraphs (c)(2) through (4) the words ``allowance for 
losses'' and adding in its place the words ``allowance for credit 
losses''.


Sec.  615.5132  [Amended]

0
10. Amend Sec.  615.5132 paragraph (a) by removing the words ``loan 
loss adjustments'' and adding in its place the words ``credit loss 
adjustments''.


Sec.  615.5140  [Amended]

0
11. Amend Sec.  615.5140 paragraph (b)(4)(ii) by removing the words 
``loan loss'' and adding in its place the words ``credit loss''.


Sec.  615.5200  [Amended]

0
12. Amend Sec.  615.5200 paragraph (c)(4) by adding the word ``credit'' 
before ``losses''.


Sec.  615.5201  [Amended]

0
13. Amend Sec.  615.5201 by removing the words ``allowance for loan 
losses'' and adding in its place the words ``adjusted allowance for 
credit losses'' in the definition of ``Risk-adjusted asset base''.


Sec.  615.5351  [Amended]

0
14. Amend Sec.  615.5351 paragraph (d) by adding the word ``credit'' 
before ``loss.''

PART 620--DISCLOSURE TO SHAREHOLDERS

0
15. The authority citation for part 620 continues to read as follows:

    Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm 
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254).


Sec.  620.5  [Amended]

0
16. Amend Sec.  620.5 by:
0
a. Removing in paragraph (f)(1)(i)(D), the words ``Allowance for 
losses'' and adding in its place the words ``Allowance for credit 
losses'';
0
b. Removing in paragraph (f)(1)(ii)(B), the words ``Provision for loan 
losses'' and adding in its place the words ``Provision for credit 
losses'';
0
c. Removing in paragraph (f)(1)(iii)(F), the words ``Allowance for loan 
losses-to-loans'' and adding in its place the words ``Allowance for 
credit losses-to-loans'';
0
d. Revising paragraph (g)(1)(iv)(B);
0
e. Removing in paragraph (g)(1)(iv)(E), the words ``allowance for 
losses'' and adding in its place the words ``allowance for credit 
losses.''
    The revision reads as follows:
    * * *
    (g) * * *
    (1) * * *

[[Page 49690]]

    (iv) * * *
    (B) An analysis of the allowance for credit losses by year of 
origination (vintage year). The number of years analyzed must be 
consistent with vintage year disclosures required by generally accepted 
accounting principles. The analysis must include the ratios of the 
allowance for credit losses to loans and net chargeoffs to average 
loans and a discussion of the adequacy of the allowance for credit 
losses given reasonable and supportable forecasts;
* * * * *

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

0
17. The authority citation for part 621 is revised to read as follows:

    Authority: Secs. 5.17, 5.19, 5.22A, 8.11 of the Farm Credit Act 
(12 U.S.C. 2252, 2257a, 2279aa-11).


Sec.  621.5  [Amended]

0
18. Amend Sec.  621.5 by:
0
a. Removing in the heading, the word ``loan'' and adding in its place 
the word ``credit''; and
0
b. Removing in paragraphs (a) and (b), the word ``loan'' and adding in 
its place the word ``credit''.


Sec.  621.8  [Amended]

0
19. Amend Sec.  621.8 paragraph (c)(2) by removing the word ``loan'' 
and adding in its place the word ``credit''.

PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS

0
20. The authority citation for part 628 is revised to read as follows:

    Authority:  Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 
5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12 
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 
2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C. 
1254 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 
U.S.C. 78o-7 note).


Sec.  628.2  [Amended]

0
21. Amend Sec.  628.2 by:
0
a. Adding in alphabetical order a definition for ``Adjusted allowances 
for credit loss (AACL)'';
0
b. Removing the definition of ``Allowances for loan losses (ALL)''; and
0
c. Adding in the definition ``Carrying value'' a new last sentence;
0
d. Revising ``Standardized total risk-weighted assets'' definitions 
second paragraph (2).
    The additions and revision reads as follows:


Sec.  628.2  Definitions

* * * * *
    Adjusted allowances for credit losses (AACL) means valuation 
allowances that have been established through a charge against earnings 
or retained earnings for expected credit losses on financial assets 
measured at amortized cost and a lessor's net investment in leases that 
have been established to reduce the amortized cost basis of the assets 
to amounts expected to be collected as determined in accordance with 
GAAP. For purposes of this part, adjusted allowances for credit losses 
includes allowances for expected credit losses on off-balance sheet 
credit exposures not accounted for as insurance as determined in 
accordance with GAAP. Adjusted allowances for credit losses excludes 
allowances created that reflect credit losses on purchased credit 
deteriorated assets and available-for-sale debt securities.
* * * * *
    Carrying value * * * For all assets other than available-for-sale 
debt securities or purchased credit-deteriorated assets, the carrying 
value is not reduced by any associated credit loss allowance that is 
determined in accordance with GAAP.
* * * * *
    Standardized total risk-weighted assets means:
    * * *
    (2) Any amount of the System institution's adjusted allowance for 
credit losses that is not included in tier 2 capital.
* * * * *


Sec.  628.20  [Amended]

0
22. Amend Sec.  628.20 paragraph (d)(3) by removing the word ``ALL'' 
and adding in its place the word ``AACL'' each place it appears.


Sec.  628.22  [Amended]

0
23. Amend Sec.  628.22 paragraph (c) by removing the word ``ALL'' in 
footnote 6 and adding in its place the word ``AACL''.


Sec.  628.63  [Amended]

0
24. Amend Table 5 to Section 628.63--Credit Risk: General Disclosures 
by:
0
a. Removing in paragraphs (a)(5), (e)(5), and (g), the words 
``allowance for loan losses'' and adding in its place the words 
``adjusted allowance for credit losses''; and
0
b. Removing in footnote 6, the words ``probable loan losses'' and 
adding in its place the words ``credit losses''.

PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED 
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

0
25. The authority citation for part 630 is revised to read as follows:

    Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit 
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254).


Sec.  630.20  [Amended]

0
26. Amend Sec.  630.20 by:
0
a. Removing in paragraph (f)(1)(ii), the words ``Allowance for losses'' 
and adding in its place the words ``Allowance for credit losses'';
0
b. Removing in paragraph (f)(2)(iii), the words ``Provision for loan 
losses'' and adding in its place the words ``Provision for credit 
losses'';
0
c. Removing in paragraph (f)(3)(v), the words ``Allowance for losses'' 
and adding in its place the words ``Allowance for credit losses'' and
0
d. Revising paragraph (g)(1)(ii)(B).
    The revision reads as follows:
    * * *
    (B) An analysis of the allowance for credit losses by year of 
origination (vintage year). The number of years analyzed must be 
consistent with vintage year disclosures required by generally accepted 
accounting principles. The analysis must include the ratios of the 
allowance for loan credit losses to loans and net chargeoffs to average 
loans and a discussion of the adequacy of the allowance for credit 
losses given reasonable and supportable forecasts.
* * * * *

Appendix A to Part 630--Supplemental Information Disclosure Guidelines 
[Amended]

0
27. Amend Appendix A to Part 630 by removing the words ``loan losses'' 
and adding in its place the words ``credit losses'' in Table B wherever 
they appear.

    Dated: August 14, 2019.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2019-19916 Filed 9-20-19; 8:45 am]
 BILLING CODE 6705-01-P