With mandatory conversion to CECL from the present incurred-loss allowance model set to begin Jan. 1, 2020, financial institutions and their representative associations are alternately calling for delays in required implementation dates and changes in the standard that will ease the anticipated blow to their earnings.
On November 5, an advocacy group of bank corporations under the banner Bank Policy Institute (BPI) penned a letter to FASB Chairman Russell Goldman proposing a re-structured approach to CECL that “would retain the CECL methodology’s intent of establishing an allowance for the lifetime of an asset on the balance sheet, but recognize the provision for credit losses in three parts.” The letter listed the three parts as “(1) for non-impaired financial assets, loss expectations within the first year would be recorded to provision for losses in the income statement with (2) loss expectations beyond the first year recorded to Accumulated Other Comprehensive Income (“AOCI”) and (3) for impaired financial assets, lifetime expected credit losses would be recognized entirely in earnings.”
The expressed intent of the BPI proposal is to reduce the impact of CECL on bank earnings at its inception date – that is, keep the expected future losses and changes in expected future losses from impacting earnings (or spread them). Moreover, a problem related to CECL as it currently stands that they would seemingly like to avoid is the earnings hit both from booking new loans and from an increase in expected future losses. They want to avoid these hits to earnings and capital as well as the pro-cyclical effect of booking big losses in earnings when the economy is going into a depression. However, they would also have to convince the regulators to ignore the resulting large debit to OCI when computing regulatory capital adequacy that would occur under the proposed scenario.
FASB said it “expects” to address the proposal sometime in the first quarter of 2019.
Earlier this year, in July, the BPI had filed a comment letter with the banking regulators requesting, “The Agencies should revise their regulatory capital framework so that the implementation of CECL will be capital neutral as to all capital requirements … both upon initial adoption and on an ongoing basis.” It offered that otherwise, CECL would “represent a new and additional capital buffer requirement that will affect how banks do businesses and have ramifications for the broader economy.”
The BPI has urged an outright implementation delay, asserting that, contrary to FASB’s contention that CECL is countercyclical, the new allowance accounting standard would prove procyclical. “Allowances will go up in bad times . . . and down in good times when the forecast improves.” The American Bankers Association has also argued against the current implementation dates, most recently calling on regulators to undertake a quantitative impact study to assess CECL’s impact on community banks.
It will be interesting to observe what, if any, action the FASB takes in response to the BPI proposals, as the FASB has demonstrated sound resolve to push CECL forward.