Bank Wire: Banking Industry Updates

Guidance issued on regulatory capital rules

Recently, the OCC, Federal Reserve and FDIC issued answers to frequently asked questions (FAQs) about the revised regulatory capital rules. The FAQs cover several topics, including the definition of capital, high-volatility commercial real estate exposures and credit valuation adjustments. Here’s one example:

Q: Can convertible instruments be included in regulatory capital even if they are convertible less than five years after issuance?

A: Convertibility of a capital instrument within five years of issuance does not preclude its qualification as regulatory capital if the instrument is convertible into a capital instrument of a higher quality.

Get ready for new credit impairment model

At press time, the Financial Accounting Standards Board was poised to finalize its proposed credit impairment model, perhaps as soon as the fourth quarter of 2015. The new model — known as Current Expected Credit Loss (CECL) — would represent a dramatic departure from current standards, requiring many banks to increase their Allowance for Loan and Lease Losses (ALLL).

Currently, banks calculate the ALLL based on incurred losses. Switching to the proposed CECL model would require banks to recognize an immediate allowance based on all expected credit losses over the life of a loan. It also would require banks to collect a significantly larger amount of data in order to make the necessary calculations. It’s anticipated that the new model will take effect in 2018 or 2019.

Watch out for auditor-independence rules

The Center for Audit Quality and the American Institute of Certified Public Accountants (AICPA) want banks and their audit firms to be mindful of certain auditor-independence requirements for FDICIA banks. FDICIA banks are those that have $500 million or more in assets and are subject to the audit and reporting requirements of the Federal Deposit Insurance Corporation Improvement Act of 1991.

Auditors that perform audits of FDICIA banks must comply with the independence standards of the AICPA, the SEC and the Public Company Accounting Oversight Board (PCAOB). In many areas, the SEC rules take precedence because they’re more restrictive than the other organizations’ rules. For example, the SEC takes the position that auditors are prohibited from providing typing and word processing services, or financial statement templates that aren’t publicly available to the audit client, because these would be considered prohibited financial statement preparation services.

To avoid auditor independence issues, FDICIA banks shouldn’t rely on their auditors for financial statement production services — including drafting, typing, formatting, printing or binding. Banks should either perform these tasks themselves or engage a third-party provider for assistance.

© 2015