Letter to FDIC on Troubled Debt Restructuring Accounting Standards Update

Federal Deposit Insurance Corporation
550 17th Street NW
Washington, DC 20429

To whom it may concern,

The American Bankers Association and the Bank Policy Institute (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).

The proposal recognizes that Accounting Standards Update No. 2022–02 (ASU 2022–02) eliminates recognition and measurement guidance for TDRs for institutions that have adopted the Current Expected Credit Losses (CECL) methodology 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: it would replace TDRs 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. 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. 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.

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