BPI and ABA Comment on FDIC Proposal for Troubled Debt Restructurings in the Assessments Score Cards for Large Banks

To Whom it May Concern:

The American Bankers Association and the Bank Policy Institute[1] (Associations) appreciate the opportunity to comment on the Federal Deposit Insurance Corporation’s notice of proposed rulemaking to replace troubled debt restructurings (TDRs) in the assessments scorecards for banks larger than $10 billion in total assets (large banks).[2]

The proposal recognizes that Accounting Standards Update No. 2022–02 (ASU 2022–02)[3] eliminates recognition and measurement guidance for TDRs for institutions that have adopted the Current Expected Credit Losses (CECL) methodology[4] and introduces new disclosure requirements for “modifications to borrowers experiencing financial difficulty” (MBEFD). The proposal would make two changes in the assessments scorecards for large and highly complex banks:[5] it would replace TDRs[6] with MBEFD in the underperforming assets ratio and change the criterion for a refinance of a consumer or commercial loan to classify as “higher-risk” based on whether the refinance is a MBEFD.

ASU 2022–02 is effective for fiscal years beginning after December 15, 2022 for entities that have adopted CECL.[7] The Financial Accounting Standard Board required filers to adopt CECL beginning in January 2020, excluding smaller reporting companies as defined by the U.S. Securities and Exchange Commission. Most others are required to adopt CECL beginning in January 2023. Accordingly, the proposed changes would go into effect for assessments beginning with first quarter 2023.

Because ASU 2022-02 eliminates recognition and measurement guidance of TDRs, the Associations support removal of TDRs from the large bank assessment scorecards. We appreciate the FDIC’s intent to replace TDRs in the assessments scorecards with something based on U.S. Generally Accepted Accounting Principles (GAAP) as revised for ASU 2022-02. The alternative of continuing to require large banks to report TDRs in the Call Report, or else report something not disclosed in their financial statements, solely for purposes of calculating deposit insurance assessments would impose significant burdens whose costs would not justify the benefits, as recognized in the proposal.[8] We further appreciate the FDIC for moving ahead to allow the large banks time to prepare for changes in their assessments, recognizing that all will have adopted CECL by first quarter 2023 and therefore no longer disclose TDRs in their financial statements.

Nonetheless, the Associations do not see MBEFD as a suitable replacement for TDRs in the large bank assessment scorecards, as explained below. Seeing no other fitting substitute, we recommend that TDRs be removed without replacement. If the FDIC is determined to seek a TDR replacement, at a minimum, TDRs should be removed on an interim basis and the proposal reissued for public comment once ASU 2022-02 has been fully implemented via the Call Report. We request that the comment period be reopened once the Call Report and instructions are revised to incorporate ASU 2022-02 to allow bankers to fully comprehend and comment on the proposed changes.

To read the full comment letter, click here, or click on the download button below.

[1] More information about the Associations is provided in the Appendix.

[2] FDIC, “Assessments, Amendments to Incorporate Troubled Debt Restructuring Accounting Standards Update,” 87 Federal Register 45023 (July 27, 2022), available at www.govinfo.gov/content/pkg/FR-2022-07-27/pdf/2022- 15763.pdf

[3] Financial Accounting Standards Board, Accounting Standards Update No. 2022–02, “Financial Instruments— Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,’’ March 31, 2022, available at www.fasb.org/page/getarticle?uid=fasb_Media_Advisory_03-31-22.

[4] Prior to CECL, a TDR needed to be separated because it had a different credit loss recognition measurement than other loans. However, under CECL all loans are measured under a lifetime loss recognition model and therefore TDR accounting is no longer needed.

[5] Per 12 CFR 327.8(f) and (g), for deposit insurance assessment purposes, a large bank is one with $10 billion or more in total assets; a highly complex bank is one with $50 billion or more in total assets and controlled by a parent holding company with $500 billion or more in total assets, or a processing bank or trust company.

[6] As reported in Call Report Schedule RC–C, Part I, Memorandum items 1.a. through 1.g, “Loans restructured in troubled debt restructurings that are in compliance with their modified terms” less the portion reported on Schedule RC–O, Memorandum item 16, “Portion of loans restructured in troubled debt restructurings that are in compliance with their modified terms and are guaranteed or insured by the U.S. government.”

[7] Entities that adopt CECL earlier than year-end 2022 are permitted to implement ASU 2022-02 earlier.

[8] Proposal, page 45027.