Bank regulatory reporting impacts and considerations due to COVID-19

Overview

The impact of and market reaction to COVID-19 continue to weigh on millions of businesses around the world. Some of these impacts may be tied to temporary factors and extreme volatility in the short term, while others may potentially reflect longer-lasting or even permanent shifts in the businesses or industries in which these companies operate. As banks navigate through this time of uncertainty, the impact of COVID-19 raises several considerations to be aware of when preparing regulatory reports for the March 31 quarter-end and beyond. The impact to regulatory reporting is commonly from operational challenges and changes to regulatory requirements to implement near-term policy changes. The report changes are either to provide temporary relief from regulatory constraints to encourage lending and lessen the economic impact on consumers and businesses or to provide accommodations to challenges in providing data under the current circumstances.

As banks navigate through this time of uncertainty, the impact of COVID-19 raises several considerations to be aware of when preparing regulatory reports for the March 31 quarter-end and beyond.

CENTER forREGULATORY STRATEGYAMERICAS

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Bank regulatory reporting impacts and considerations due to COVID-19

Operational impact considerations

Working remotely for extended periods may present challenges to delivering high-quality regulatory reports. These challenges can range from the employees’ inability to access reporting systems and company applications to increases in security risks.

There will likely also be a significant increase in the number of manual adjustments due to changes in reporting requirements, including capital requirements and accounting estimates. The nationwide spread of COVID-19 could result in changes to financial results and related disclosures that will significantly drive up the quarter-over-quarter changes, such as in credit deterioration, loan defaults, and loan modifications or refinancing. These changes would subsequently heighten review and validation efforts required prior to submitting reports. The potential delays in the financial close process and availability of nonfinancial data may further compound problems and affect downstream reporting processes. Process changes will be needed to implement the interim rules. These are likely to be manual in nature, requiring careful implementation of compensating controls.

Communication is critical in this period. Continuous, open channels with risk, operations, IT, lines of business, and internally within the reporting team, as well as with the regulators, are a must. Personnel should consider the need to evaluate the necessity of non–reporting-related meetings and reprioritize their reporting calendar in anticipation of delays due to a remote workforce.

Toward the submission of the prepared regulatory reports, reporting teams should assess the ability to attest to the accuracy and completeness of reporting data and ensure timely management review of the prepared reports, which in many cases remain manual. Data editing and analysis is even more critical to ensure the risk of material misstatements is minimized. Processes should be put in to place to obtain the signatures for required attestation. These processes must be well-documented.

Regulatory filing deadline extensions

The banking regulators recently announced certain regulatory reporting relief to financial institutions due to disruptions and financial impact caused by COVID-19. Institutions are encouraged to contact their Reserve Bank or primary federal regulator in advance of the official filing deadline if they anticipate a delayed submission.1, 2

• FFIEC 031/041/051: The banking agencies are allowing institutions to submit their March 31, 2020, Call Reports within 30 days of the official filing date.

• FR Y-9C and FR Y-11: The FRB is allowing institutions with $5 billion or less in total assets to submit their March 31, 2020, reports within 30 days of the official filing due date.

• FR Y-9C (for entities not covered above), FFIEC 002, FFIEC 009, and other regulatory reports to the FRB: As outlined in SR 13-6, the FRB does not expect to take supervisory action against a banking organization that is unable to make timely filings due to a major disaster or emergency. Therefore, if an institution is experiencing such conditions, the institution should contact the FRB to request a filing extension.

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Bank regulatory reporting impacts and considerations due to COVID-19

Reporting-specific topic ConsiderationsInteragency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus3

The FRB, FDIC, NCUA, OCC, CFPB, and state banking regulators have issued an interagency statement to provide guidance and encourage financial institutions to work prudently with borrowers affected by COVID-19 and have updated this guidance to reflect the impact of the CARES Act. These statements provide guidance on the reporting of loans on the FR Y 9-C, Call Report, and FFIEC 002, primarily on Schedule N. The effect of the statement will also affect loan disclosures on legal entity reports (such as FR Y-11, FR 2314, and FR Y-7N).

Accounting for loan modifications: Loan modification programs are viewed as positive actions by the agencies to mitigate adverse effects on borrowers due to COVID-19. Working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs.

The agencies have confirmed with staff of the FASB that short-term modifications made on a good-faith basis in response to COVID-19 are not TDRs. These modifications include payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Past-due reporting: Payment deferral, if agreed by the financial institution, may result in no contractual payments being past due, and these loans are not considered past due during the period of the deferral.

Nonaccrual status and charge-offs: Loans generally should not be reported as nonaccrual in schedule RC-N of the FFIEC 031/041/FFIEC 002 report and schedule HC-N of the FR Y-9C report during the short-term arrangements. Institutions should refer to the charge-off guidance in the instructions for schedule RI-B of the FFIEC 031/041 report and schedule HI-B of the FR Y-9C report if more information becomes available indicating a specific loan will not be repaid.

In working with the borrowers, it is important to ensure appropriate processes and controls are in place to capture the deferred and modified payment information correctly in the recording and reporting systems.

Regulatory Capital Rule: Eligible Retained Income4

An interim final rule that revises the definition of eligible retained income has been issued, effective March 20, 2020, and is intended to strengthen banking organization’s incentives to use its capital buffers in adverse conditions and serve as a financial intermediary and source of credit to the economy.

The definition of eligible retained income was revised on the FR Y 9-C, Schedule RC-R to be the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization’s net income over the preceding four quarters.

This definition is applicable to banking organizations’ buffer requirements, including the fixed 2.5 percent capital conservation buffer and, if applicable, the countercyclical capital buffer, the GSIB surcharge, and enhanced supplementary leverage ratio standards.

Regulatory Capital Rule: Temporary Exclusion of US Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary Leverage Ratio (SLR)5

The FRB has issued an interim final rule that revises, on a temporary basis for BHCs, S&L HCs, and IHCs of FBOs, the calculation of total leverage exposure, the denominator of the SLR in the FRB’s capital rule, to exclude the on-balance-sheet amounts of US Treasury securities and deposits at Federal Reserve Banks. This exclusion is immediate and will remain in effect through March 31, 2021. The FRB has adopted this interim final rule to allow BHCs, S&L HCs, and IHCs subject to the SLR increased flexibility to continue to act as financial intermediaries. The tier 1 leverage ratio is not affected by this rulemaking.

Reporting-specific considerations

The following is a noninclusive list of regulator-issued guidance for financial institutions to effectively serve as a financial intermediary and source of credit to the economy in this adverse condition. The banking agencies were in the process of

updating the March reporting instructions, as well as the supplemental guidance that is provided with the quarter-end reports (such as Call Report and FR Y-9C). These should be available in the near term.

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Bank regulatory reporting impacts and considerations due to COVID-19

Reporting-specific topic Considerations

Regulatory Capital Rule: Temporary Exclusion of US Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary Leverage Ratio (SLR)5

For purposes of reporting the SLR as of June 30, 2020, banking organizations subject to this interim final rule must reflect the exclusion of the assets from total leverage exposure, as if this interim final rule had been in effect for the entire second quarter of 2020. This will have the effect of reducing any constraint imposed by the SLR on these exposures as these banking organizations respond to market disruptions. The purpose of the temporary exclusion is to allow banking organizations to expand their balance sheets as needed in order to continue to serve as financial intermediaries, rather than to allow banking organizations to increase capital distributions. Additionally, the FRB will administer the interim final rule accordingly. This interim final rule does not affect the tier 1 leverage ratio, which will continue to serve as a backstop for all banking organizations subject to the capital rule. Reports affected by the interim final rule are the FR Y-9 series of reports, FR Y-14A/Q/M, FR Y-15, and FFIEC 101.

Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (SA-CCR)6

The FRB and FDIC have issued a notice to allow depository institutions and depository institution holding companies to implement the SA-CCR final rule for the first quarter of 2020, one quarter early and on a best-efforts basis if the banking organization chooses to do so. The SA-CCR rule was originally issued with an effective date of April 1, 2020. The rule now can be adopted with the March 31 reporting.

The SA-CCR rule implements a new approach for calculating the exposure of derivative contracts under the agencies’ regulatory capital rule. The SA-CCR rule also revises other aspects of the capital rule related to total leverage exposure (the denominator of the SLR) and the cleared transactions framework.

By allowing early adoption of the SA-CCR rule, the notice allows banking organizations to implement the SA-CCR methodology’s more risk-sensitive measurement of the exposure amounts of derivative contracts one quarter earlier than the SA-CCR rule provided. The agencies understand that banking organizations are in the process of refining their systems to implement the SA-CCR rule and, therefore, for purposes of the first quarter, early adoption would be on a best-efforts basis.

Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses (CECL) Methodology for Allowances7

The OCC, FRB, and FDIC have issued an interim final rule that delays the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The agencies are providing this relief to allow banking organizations to better focus on supporting lending to creditworthy households and businesses with respect to the recent strains on the US economy while also maintaining the quality of regulatory capital.

A banking organization is eligible to use the interim final rule’s five-year transition for a fiscal year that begins during the 2020 calendar year and elects to use the transition option in a Call Report or FR Y–9C (as in effect January 1, 2020). The interim final rule provides electing banking organizations with a methodology for delaying the effect on regulatory capital of an estimated increase in the allowance for credit loss that can be attributed to the adoption of CECL, relative to the increase in the allowance for loan and lease losses that would occur for banking organizations operating under the incurred loss methodology. Firms who chose to defer adoption of CECL to a later date will have the two-year transition reduced by the number of quarters the firm uses the statutory relief. The impact of this approach will be implemented on the FR Y 9-C and Call Report through revisions to the instructions for these reports.

FR Y-10 Communication between the departments is crucial to ensure accurate reporting. Over the next few quarters, there will likely be increasing activities in acquisitions, closures, and asset transfers, not to mention government investments in certain institutions. The reporting teams need to be on the lookout for these changes to legal entities.

FR 2052A Certain financial institutions (such as categories 3 and 4) have been asked to move to the daily reporting routine instead of the current monthly reporting process. Efforts, infrastructure, and resources need to be aligned to adapt to this increased reporting burden.

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Contacts

Marjorie ForestalPrincipal | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Dmitriy GutmanManaging Director | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Kenneth LamarIndependent Senior Adviser Deloitte & Touche LLP

Minhee ChoiSenior Manager | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Claudio RodriguezSenior Manager | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Van NguyenManager | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Bank regulatory reporting impacts and considerations due to COVID-19

Acronym Description

COVID-19 Coronavirus disease 2019

FFIEC 031/041/051 Consolidated Reports of Condition and Income (Call Reports)

FR Y-9C Consolidated Financial Statements for Bank Holding Companies

FFIEC 002 Report of Assets and Liabilities of US Branches and Agencies of Foreign Banks

FFIEC 009 Country Exposure Report

FR Y-11 Financial Statements of US Nonbank Subsidiaries of US Holding Companies

FRB Federal Reserve Board

FDIC Federal Deposit Insurance Corporation

NCUA National Credit Union Administration

OCC Office of the Comptroller of the Currency

CFPB Consumer Financial Protection Bureau

FASB Financial Accounting Standards Board

BHC Bank holding companies

S&L HCs Savings and loan holding companies

IHCs Intermediate holding companies

FBOs Foreign bank organizations

GSIB Global systemically important bank

SLR Supplementary leverage ratio

CECL Current expected credit losses

TDRs Troubled debt restructurings

Acronyms as used in this article

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Bank regulatory reporting impacts and considerations due to COVID-19

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Endnotes

1. Federal Financial Institutions Examination Council, “Financial Regulators Highlight Coordination and Collaboration of Efforts to Address COVID-19,” press release, March 25, 2020.

2. Board of Governors of the Federal Reserve System, “SR 13-6 / CA 13-3: Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency,” accessed April 8, 2020.

3. Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, and Conference of State Bank Supervisors, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” press release, March 25, 2020.

4. Federal Insurance Deposit Corporation, “Regulatory Capital Rule: Eligible Retained Income,” accessed April 8, 2020.

5. Board of Governors of the Federal Reserve System, “Regulatory Capital Rule: Temporary Exclusion of US Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary Leverage Ratio,” accessed April 8, 2020.

6. Board of Governors of the Federal Reserve, Federal Insurance Deposit Corporation, and Office of the Comptroller of the Currency, “Standardized Approach for Calculating the Exposure Amount of Derivative Contracts,” accessed April 8, 2020.

7. Board of Governors of the Federal Reserve, Federal Insurance Deposit Corporation, and Office of the Comptroller of the Currency, “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances,” accessed April 8, 2020.