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FASB's small-cap CECL proposal dampens congressional efforts to delay standard

Despite early congressional momentum to postpone a sweeping new accounting standard, enthusiasm has sputtered because of a delayed effective date proposal for small institutions and a reorientation of banks' legislative priorities.

A pair of bills in the House and Senate were introduced in late May and early June, respectively, that would require the Securities and Exchange Commission to study the broad economic effects of the current expected credit loss accounting standard.

While the bills would not explicitly stop CECL's implementation, they would bar federal banking regulators from enforcing companies to comply with the standard.

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CECL will change how banks reserve for loan losses. It will require institutions to recognize an estimate of the potential losses over a loan’s lifetime and record those losses at origination. Many industry stakeholders believe CECL will cause a large, one-time capital hit for banks and make it more difficult to lend during times of economic stress.

As the industry turned to Congress in a last-ditch effort to stall or kill the standard, the Financial Accounting Standards Board voted July 17 to propose allowing small banks, credit unions and privately held companies to delay CECL implementation until January 2023.

But the delay for smaller institutions only "takes some of the immediate pressure off" of Congress from bankers to fully stop CECL, according to Ed Mills, a public policy analyst at Raymond James.

Mills said the proposed delay for smaller institutions is a "gift to the bank lobby" because it can reorient its priorities and put off Capitol Hill advocacy on the issue for now.

Mills said FASB decided to propose the delay as a test of sorts to see how the nation's biggest institutions will be impacted.

"The question for Congress is, and ultimately the question for FASB is, did [FASB] draw the line accurately enough?" Mills said in an interview, referring to which companies will be subject to the delay. "The higher that line goes, the less likely it is for Congress to get involved."

For Rep. Blaine Luetkemeyer, R-Mo., the delay is "not enough" to fully address CECL's potentially systemic negative impacts on the U.S. economy.

"Without a commitment to better understand the broad economic consequences of CECL, an implementation delay is merely a halfhearted attempt to placate its opponents," Luetkemeyer wrote in a statement the day FASB voted on the proposal. "This is not an acceptable alternative to a comprehensive analysis of the standard's potential economic effects on financial institutions and consumers across the nation."

Luetkemeyer has warned about CECL for months and has been building a body of evidence to prove the standard will negatively affect the economy.

According to a senior Republican aide in the Senate, the industry's boisterous calls to delay CECL have also waned because other priorities have taken precedence.

Lowering the community banking leverage ratio to 8%, a real-time payments system set up by the Federal Reserve and regulatory relief for banks offering services to the cannabis industry are all higher on the priority list for bankers right now.

"It's not that [CECL] is dead, it's just not at the front of the parade," the aide said, speaking on the condition of anonymity.

The Credit Union National Association, a trade association that lobbies in Washington for the credit union industry, has been mum on CECL since the bills were introduced in Congress. The group sent a letter to the co-sponsors of the House bill shortly after the lower-chamber measure was introduced, pledging support as it "moves through the legislative process."

The Senate bill has failed to gather any Democratic co-sponsors, which is critical for it to clear a 60-vote filibuster in the upper chamber. Even if the bill is inserted into a larger legislative vehicle — like a continuing resolution or big appropriations package — without Democratic co-sponsors, it may not be palatable for Senate GOP leaders to include in any bigger bill, the aide said.

In the House, the CECL-delay bill introduced by Rep. Vicente Gonzalez, D-Texas, has failed to gain enough momentum in the Financial Services Committee for Chair Maxine Waters, D-Calif., to seriously consider it.

According to a senior aide in the House, the next step is to push for a hearing on the issue. CECL still sits on the back burner for most members of the committee, the aide said, and a hearing could make it more visible.

"We're finding that the more lawmakers learn about the very real problems with CECL, the more interested they become in this issue," a spokesperson for the American Bankers Association wrote to S&P Global Market Intelligence in an email.

Rep. Gregory Meeks, D-N.Y., is mulling a subcommittee hearing on CECL, the aide said. Meeks, who chairs the Subcommittee on Consumer Protection and Financial Institutions, has told S&P Global Market Intelligence in interviews that he has been personally encouraging Waters to study the issue. The bill introduced by the Texas congressman has garnered 35 co-sponsors, only eight of whom are Democrats, whose support is crucial given their majority in the chamber.

When Congress returns from its August recess, the bills face a "significant uphill battle from here," Mills said.

"Accounting standards are very esoteric, and it's very hard to get a coalition to change law to prevent the standards from occurring," he said.