In an effort to better assess the impact on regulatory capital and the regulators' assessment of earnings of our banking clients of two new accounting standards, Accounting Standards Update No. 2016-01 Financial Instruments-Overall, and Accounting Standards Update No. 2016-02 - Leases (ASU 2016-01 and 2016-02), we recently spoke with personnel in the Boston and New York Regional FDIC offices. You may recall from reading previous newsletters that ASU 2016-01 requires that the change in fair value of equity securities must be recognized in net income rather than comprehensive income. Several of our bank clients hold equity securities in their investment portfolios.
Given this upcoming change in accounting, we were interested to learn if there is any anticipated regulatory relief. Based on our discussions, it doesn't appear likely that the regulatory agencies will grant relief from this provision. While they indicated that a bank's capital position needs to be able to absorb such impacts, they also noted that they recognize these adjustments may cause significant volatility and they will focus on core earnings when appropriate.
In regard to the new lease standard (ASU 2016-02), we were curious how these new rights to use assets will be treated for capital purposes from a risk weighting perspective. It was indicated that at this point, it looks like they will be assigned risk weightings based on the underlying leased asset.
The regulators also indicated that they are contemplating the issuance of a Financial Institution Letter (FIL) in the relatively near future discussing their current thoughts on the treatment of these new standards.
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