On January 28, 2019, the FASB hosted a public roundtable on CECL intended to cover one main topic as well as a secondary topic. A large group was in attendance, with representatives from banks of various sizes, regulators, representatives from audit firms, as well as bank stock analysts and other readers of financial statements.
Bank Policy Institute Proposal
The primary topic was a letter containing a proposal made by the Bank Policy Institute (BPI) to FASB on November 5 identifying their concerns with CECL, as well as some proposed changes to address these concerns. The BPI is a banking trade group whose membership includes over 30 of the largest and most influential banks in the country. The first part of the letter asked for a delay in the implementation timeline as well as a more comprehensive study to be done to assess the “systemic and economic risks posed by CECL.” The BPI’s proposed change to the standard is to essentially split the impact of CECL into three categories:
- Non-impaired financial assets
- Loss expectations within the first year would be recorded to provision for loan losses in the income statement
- Loss expectations beyond the first year would be recorded to Accumulated Other Comprehensive Income (AOCI)
- Impaired financial assets would have expected losses recorded entirely in earnings
The entire proposal can be read here. If this splitting of the total expected losses sounds familiar, it may be because this proposal has a lot in common with the “three bucket approach” that was proposed back when FASB and IASB were attempting to converge on expected loss standards, and in fact has some elements in common with IFRS-9, IASB’s expected loss standard that went into effect in 2018. The BPI points to both the negative capital and earnings impacts of the current CECL standard as well as claiming that CECL, as written, would be significantly more procyclical than the current incurred loss standard, and that procyclicality could lead to an unintended tightening in lending during an economic downturn. The letter and proposal were signed by around 20 banks within the BPI’s membership, although notably absent were the signatures of some of the very largest banks in the country: JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, and TD Bank, who are all members of the BPI.
Discussion during the roundtable consisted primarily of the various signatories of the BPI proposal explaining and answering questions from FASB board members and staff, as well as other stakeholders around the table. It was clear that the position of the signatories was that the proposal, while substantial, was simply meant to lay out a framework, and not intended to be a fully mature accounting standard on its own. They also expressed praise for FASB’s deliberate standard-setting process and felt that some of the issues being address regarding the proposal would be able to be more fully addressed in that process. Discussion for this topic extended for nearly three hours, with FASB board members and staff in particular appearing to be eager to get into the details of the proposal and better understand it. Support among banks for the proposal was far from universal, with several of the banks in attendance expressing views in opposition to the proposal. FASB staff is committed to doing more research on the proposal and bring more information to the board later in Q1.
It seems hard to imagine that the FASB would take up the proposal without changing adoption timelines for CECL. The change, including the associated costs, for banks who are already well down the road on their CECL implementation would be significant, to the point of potentially having to go completely back to the drawing board in the most extreme cases. FASB was giving the proposal a fair hearing, but they are also holding their cards pretty close to their chest, as CECL has become something of a political football at this point. Hopefully this becomes clearer when FASB staff presents to the board later in Q1.
Vintage Disclosure Discussion
The secondary topic of discussion at the roundtable was an interesting disclosure issue related to the new credit quality vintage disclosure that exists in the new CECL standard. The background of this issue is that the illustrative example of this disclosure in the guidance contains lines for “current period gross write-offs and recoveries”, but this requirement was not outlined in the text of the ASU itself, leading to some confusion among banks and analysts as to if it was part of the disclosure of not.
This issue was discussed at the 11/7 board meeting and then again at the 12/18 board meeting. Conclusions reached were essentially that the gross write-offs and recoveries were intended to be part of the disclosure requirement; however, FASB was sympathetic to the operational challenges to adding the requirement so late in the implementation process and, therefore, asked the staff to do more research and outreach on the issue. The inclusion of the topic at this roundtable was part of that outreach.
Early in the discussion, one of the issues brought up by analysts was that they desired this information to be the cumulative gross write-offs and recoveries against a particular vintage of loans, which was even more than the illustrative example in the ASU outlined. Banks expressed that is would be extremely difficult to go back to get the cumulative losses and recoveries against vintages of loans for the last five years, as would be the requirement based on this desire. A few bankers also expressed that they do not use this information in this way today for managing credit risk and questioned the value of disclosing information that is not even used by management.
It seems likely that this will end in a compromise with both analysts and banks having to move from their current positions: banks not wanting to provide the information at all, and analysts wanting to have cumulative write-offs and recoveries against the last five vintage years. The logical compromise, which FASB board members seemed to propose, was requiring only the current period write-offs and recoveries, and then leaving it to the analysts to build the cumulative amounts over the next few years of disclosures. What is less clear is if any update to this disclosure will have the same rapidly approaching adoption date as the rest of the ASU, or if it will be split into a separate update with a different adoption date.
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