Banking regulators issued some relief for financial institutions that are worried about the effects of adopting a new credit loss standard, but bankers are worried it won’t go far enough.

The Federal Reserve, the Federal Deposit Insurance Corporation, and the U.S. Treasury’s Office of the Comptroller of the Currency jointly issued a final regulatory capital rule that gives financial institutions three years to phase in the regulatory capital effects produced by implementing Accounting Standards Codification Topic 326. That’s the accounting rule taking effect in 2020 requiring banks to give investors earlier warning about signs of trouble in their lending portfolios by booking losses using a “current expected credit losses” (CECL) methodology.

CECL requires entities, most notably banks and other financial institutions, to use a more forward-looking approach to estimate losses and book reserves. Under ASC 326, entities will reflect the possibility of losses even before they have occurred, even on instruments that are fully performing.

With the accounting rules forming the basis for regulatory capital requirements, the financial services sector has called on banking regulators to adjust those requirements to reflect the more conservative approach. The CECL implementation will affect critical metrics like retained earnings, deferred tax assets, and allowances, all of which factor into regulatory capital ratios.

That prompted banking regulators to propose and ultimately finalize a three-year phased approach to reflecting the CECL method in bank capital reporting. The final rule gives banking entities an option to phase in over three years the Day 1 “adverse effects” on regulatory capital that result from implementing CECL. The final rule also makes other amendments to regulatory capital rules, stress testing rules, and regulatory disclosure requirements.

The American Bankers Association (ABA), which is part of a movement calling for a halt to CECL so its effects on the economy can be further studied, says it appreciates the acknowledgment that CECL will produce a huge change to bank accounting. The final rule doesn’t go far enough, however, to address banks’ concerns, the ABA says. In fact, the ABA and numerous other banking advocacy organizations renewed their call for a delay in CECL implementation so the standard's effect on the banking sector and the economy as a whole can be better understood.

“We are encouraged that a growing number of policymakers are recognizing the risks posed by CECL, and we will continue our appeal for a thorough review of the standard’s impact on banks, lending, and the broader economy before determining whether implementation should move forward,” said ABA President and CEO Rob Nichols in a statement.

The Financial Accounting Standards Board, which issued the accounting change in 2016, has not formally answered the call for a deferral in the standard, but public statements by some at FASB suggest the board considered some of the recently raised concerns during its standard-setting process. Representatives of the Securities and Exchange Commission, including Chairman Jay Clayton, have stated their support for FASB’s independence as the standard-setter.

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