Six banking regulators on Sunday offered accounting relief to banks facing an onslaught of customer requests to extend loan terms or reduce interest rates due to the new coronavirus pandemic.
The agencies said in a joint statement that not all loans modified because of Covid-19 should be considered troubled debt restructurings. The statement matters because modifications that qualify as troubled debt restructurings trigger potentially burdensome accounting requirements under major new loan loss accounting rules.
“The agencies encourage financial institutions to work with borrowers, will not criticize institutions for doing so in a safe and sound manner, and will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs),” the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, and the Conference of State Bank Supervisors said.
Banks worried that accounting for large volumes of troubled debt restructurings would not only be time-consuming but also result in even bigger credit losses under the new current expected credit losses (CECL) accounting standard.
- The regulators said they consulted with the Financial Accounting Standards Board, the authors of CECL, before issuing the joint statement. FASB said in a statement Sunday night it agreed with the regulator approach.
- The CECL accounting standard outlines what loan modifications should be considered troubled debt restructurings. Two criteria must be met: The borrower must be experiencing financial difficulty, and the bank must grant a concession like a principal or interest rate reduction it wouldn’t otherwise consider.
- The accounting overhaul requires bankers to look to the future and consider potential losses the day they issue a loan. In a big change from outgoing practice, credit losses related to potential troubled debt restructurings also must be incorporated into this loan-loss estimate.