A credit union proponent this week urged the Financial Accounting Standards Board, or FASB, to delay its controversial new approach to loan-loss reserving, and a community bank advocate said worries about complexity and cost permeate the lending industry.
This comes ahead of a FASB meeting with credit union leaders, bankers, their auditors and other stakeholders on June 12. The gathering was scheduled to field rule implementation questions about the new current expected loss model, or CECL, which was finalized in 2016 and remains on track to take effect in 2020 for publicly traded institutions and 2021 for others, a FASB spokeswoman said.
But the National Association of Federally-Insured Credit Unions, in a letter to FASB this week, called for an indefinite suspension of CECL to allow for the accounting standards board to reassess the pending rule and its potentially negative impact on small institutions. NAFCU said its staffers would attend the June 12 meeting and air their concerns.
In the letter, NAFCU President and CEO Dan Berger said CECL was created to address shortcomings among publicly traded companies — to provide greater transparency for investors — and since credit unions are owned by their members, the new rule should not apply to them. It would amount to an unnecessary but "costly" and "resource-intensive" change. He said FASB should pause, delay implementation and pursue "all available options to ease the burden of this complex accounting standard."
FASB spokeswoman Christine Klimek told S&P Global Market Intelligence that "there is no plan at this point to delay the standard." She said the upcoming meeting is "really to assist with interpretive questions about implementation and guidance, but not about changing the standard."
During a multiyear debate about CECL, leading up to its completion last year, community banks and credit unions linked arms in opposition to the change. For now, banking advocates say they have accepted that CECL is settled and are recommending that banks prepare for the change.
But they also say concerns pepper the financial sector, and should FASB crack open a door to change at the meeting next week, it would provide an opportunity for the banking industry to punctuate worries about the accounting standard's intricacies and expenses, particularly those tied to far-reaching data compilation that may ultimately be required.
"There is fear out there," James Kendrick, vice president of accounting and capital policy at the Independent Community Bankers of America, said in an interview.
At issue is FASB's decision to transition the banking and credit union industries away from a loan-loss model based on incurred losses — and toward an expected-loss model, under which lenders will forecast losses for the entire life of a loan. Under CECL, lenders would use these forecasts, along with data on historic losses and other factors, to set aside allowances to cover all anticipated losses at origination.
FASB officials said lenders were surprised by the depth and breadth of the last financial crisis. As such, many had to significantly boost allowances to catch up with mounting loan losses. This caused wild swings in earnings that stunned investors. The intention of CECL is to enable lenders to bolster allowances during periods of relative prosperity and, in doing so, better guard against the threats of the next downturn. It also is aimed at giving investors a clearer view of lenders' outlook on their loan books.
Bankers have agreed that the current incurred-loss approach is not perfect and improvements are needed. But community bankers in particular have contended that a key component of CECL — predicting all likely losses on multiyear loans — could amount to guesswork without major investments in data gathering, software and forecasting talent. FASB officials and regulators have assured small banks that they will not have to make costly investments, and that they can continue to use basic computer programs and traditional lender assessments of customers' ability to repay in concert with historical loss rates, Kendrick said.
Should that prove to be the case, Kendrick thinks that community banks would be able to make the transition fairly smoothly. But, he added, many bankers remain concerned that big banks such as JPMorgan Chase & Co. and Bank of America Corp. will devise intricate forecasting models that, eventually, regulators will see as best practices for the industry. This could lead to regulators imposing this kind of approach onto community lenders, many of whom could not afford to comply.
"Once you get to modeling, it gets very complex, very quick," Kendrick said.
He also noted that there is concern that the accounting rule change will cause banks to scale back on lending in order to simplify and focus on only the borrowers with pristine credit histories. This would restrict the flow of credit and could hurt the broader economy, Kendrick said.
He noted that most community banks are not heavily exposed to subprime borrowers, but banks that are active in that arena are likely to pull back. "I do think it is fair to speculate that some of that lending will get curbed," Kendrick said.