The Federal Reserve announced Friday that it would loosen bank regulations to support lending during the COVID-19 pandemic. The Federal Reserve Board specifically modified two previous regulations: the standardized approach for measuring counterparty credit risk rule (SA-CRR) and the current expected credit loss rule (CECL).
The SA-CRR modification will apply to the reporting period that ends on March 31, 2019. Banks can choose whether to follow the modified CECL rule or the old CECL rule. The Federal Reserve Board will allow comments on the CECL rule for forty-five days.
The Federal Reserve explained the significance of the modified rules:
The “standardized approach for measuring counterparty credit risk” rule, also known as SA-CCR, was finalized by the agencies in November 2019, with an effective date of April 1. It reflects improvements made to the derivatives market since the 2007-2008 financial crisis, such as central clearing and margin requirements. To help improve current market liquidity and smooth disruptions, the agencies will permit banking organizations to early adopt SA-CCR for the reporting period ending March 31. Additionally, the agencies issued an interim final rule that allows banking organizations to mitigate the effects of the “current expected credit loss,” or CECL, accounting standard in their regulatory capital. Banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years. This is in addition to the three-year transition period already in place. Alternatively, banking organizations can follow the capital transition rule issued by the banking agencies in February 2019.
Both modified regulations allow banks to assume more risk in lending to individuals or businesses.
The Federal Reserve additionally extended the regulatory report submission deadline for small financial institutions on Thursday. The board announced sweeping measures last Monday in response to COVID-19 concerns. In mid-March, the Federal Reserve slashed its interest rate to 0.25 percent in preparation for COVID-19 economic effects.
These changes compliment the Federal Reserve’s policy to encourage small-money lending to individuals and small businesses during the continuing COVID-19 crisis.