Bank regulators complete rule offering CECL relief

Banking regulators have finalized a rule that aims to help banks deal with the regulatory capital impact of the Financial Accounting Standards Board’s (FASB) wide-reaching credit losses standard.

The rule offers banks the option to phase in over three years, the “adverse effects” on regulatory capital banks expect to feel when they adopt the FASB’s new accounting standard, published in June 2016 as Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard starts going into effect in 2020 for publicly traded financial institutions.

“We’re very appreciative the agencies have moved forward by finalizing the rule,” said James Kendrick, vice president of accounting and capital policy at the Independent Community Bankers of America. “We would have rather seen five years. But we think three years would be welcomed by most, if not all, community banks.”

The accounting standard, considered the FASB’s signature response to the 2008 financial crisis, applies to all businesses but mostly affects banks, particularly how they account for souring loans. The standard requires banks to estimate and book losses on the day they issue a loan instead of waiting for customers to miss payments before setting aside loan loss reserves. The increase in loan loss reserves means banks will have to shore up the capital they hold for regulatory purposes.

The regulatory rule — finalized on Dec. 18, 2018, as a joint effort between the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) — largely enshrines the provisions of a proposal the three regulators issued in April via Regulatory Capital Rules: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rules and Conforming Amendments to Other Regulations.

When the regulators issued the proposal for public comment, many banks applauded the move to offer relief, but most asked for even more help. Several banks and professional groups asked to be allowed to phase in the capital hit over five years instead of three. Others took the opportunity to air grievances about the FASB’s standard in general, calling on the regulators to force the FASB to make changes to the standard or conduct a formal cost-benefit analysis of the impact of the standard before allowing it to be implemented.

The American Bankers Association (ABA) in a statement on Dec. 18, 2018, said the group appreciated the regulators’ help but said the final rule did not go far enough. The group also repeated complaints about the accounting standard, often called by its acronym “CECL” (Current Expected Credit Loss standard).

“Banks have long been concerned about CECL’s cost and impact on our ability to serve our customers and communities, particularly in times of economic stress,” ABA president Rob Nichols said in a statement. “That’s why ABA believes CECL must be delayed until a quantitative impact study can be conducted and the economic consequences of the accounting standard are fully understood.”

As an independent standard-setter, the FASB is not beholden to the regulators, nor do the regulators have authority to force the accounting body to take action. Nevertheless, the drumbeat against the credit losses standard has intensified in recent months as banks prepare to follow the sweeping new rules.

The ABA, several individual banks and some lawmakers have appealed to the FASB as well as the Financial Stability Oversight Council (FSOC) to delay the accounting standard or change key parts of it. A group of 28 Republican members of Congress on Dec. 18, 2018, sent a letter to Treasury Secretary Steven Mnuchin, who chairs the FSOC, to delay the compliance date. The FSOC discussed the issue in a closed session on Dec. 19, 2018, but did not take action. Also on Dec. 19, 2018, FASB Chairman Russell Golden announced that the FASB would hold a roundtable meeting at its headquarters in Norwalk, Connecticut, to address some of the recent complaints about the standard.

The bank regulator’s rulemaking is considered an important step toward easing the adoption of the new accounting rule. The three-year phase in also is expected to help regulators to have time to understand how the credit losses standard could affect banks’ day-to-day operations.

“I believe regulators when they say that when they adopted this option to transition into CECL, they want to monitor impact of CECL,” said accounting firm partner Mandi Simpson. “I think that’s exactly what they’re going to be doing.”

Published in June 2016, the FASB’s credit losses standard replaces existing generally accepted accounting principles’ (GAAP) requirements that allow banks to estimate losses only after they are “probable.” In practice, this has often meant that loan losses are only accounted for once borrowers default. During the financial crisis, investors, regulators and banks themselves said loan loss provisions were recognized “too little, too late.”

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