Despite bipartisan pressure at a recent congressional hearing, the federal banking agencies have finalized a controversial proposal providing a three-year transition period before regulatory-capital calculations must take into account current expected credit loss (CECL) reserving.  As has long been the case, FASB standards apply to covered banking organizations under GAAP, but capital implications that would otherwise tie into GAAP-demanded reserving may be delayed, a process the agencies believe will ensure no adverse macroeconomic or credit-availability effects.  While financial institutions as a whole are subject to GAAP and thus to CECL, the new standard’s impact where there are no capital requirements is limited to the profit impact of higher reserves over the life of a loan or certain market exposures.  To the extent that CECL alters regulatory capital, these reserve-related profit implications are significantly magnified in ways that will not only affect bank credit-risk decisions, but also the extent to which banks remain in higher-risk, longer-term credit products that will prove particularly costly to their capital ratios. 

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