Bank regulators make it easier to account for changes in distressed debt
Six bank regulators offered accounting relief to banks on Sunday facing a wave of customer demands to extend loan terms or cut interest rates due to the novel coronavirus pandemic.
The agencies said in a joint statement that all loans amended due to Covid-19 should not be considered distressed debt restructurings. The disclosure is important because changes that qualify as distressed debt restructurings trigger potentially onerous accounting requirements under the new major loan loss accounting rules.
“Agencies encourage financial institutions to work with borrowers, will not criticize institutions for doing so in a safe and healthy manner, and will not order supervised institutions to automatically categorize loan changes as distressed debt restructurings ( TDR), “said 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. noted.
Banks concerned that accounting for large volumes of distressed debt restructurings would not only take a long time, but also lead to even greater credit losses under the current new accounting standard for expected credit losses (CECL).
- Regulators said they consulted with the Financial Accounting Standards Board, the authors of CECL, before issuing the joint statement. The FASB said in a statement on Sunday evening that it agreed with the regulator’s approach.
- The CECL accounting standard describes which loan modifications should be considered as restructuring of distressed debts. Two criteria must be met: the borrower must encounter financial difficulties and the bank must grant a concession such as a reduction in principal or interest rate that it would not have considered otherwise.
- The accounting overhaul is forcing bankers to look to the future and consider potential losses on the day they grant a loan. In a big change from outgoing practice, credit losses from potential distressed debt restructurings should also be factored into this estimate of loan losses.