trending Market Intelligence /marketintelligence/en/news-insights/trending/g5SQTOVgzJdjYW0dVWwz-Q2 content esgSubNav
In This List

Politics likely to derail Senate Republicans' CECL-delay bill


Street Talk | Episode 94: Recessionary fears in ’22 overblown, Fed could overtighten


Insight Weekly: Ukraine war impact on mining; US bank growth slowdown; cloud computing headwinds


Investment Banking Essentials Newsletter April Edition - 2022


Banking Essentials Newsletter April Edition - 2022

Politics likely to derail Senate Republicans' CECL-delay bill

Congress is unlikely to come to banks' rescue with a law stopping a widely criticized accounting standard from going into effect.

A recently introduced bill that would delay the implementation of the current expected credit loss accounting standard is expected to sputter given the caustic party-line divide in Washington, political analysts said. The bill is seen as a last-ditch effort by industry stakeholders to delay the standard, which many in banking fear will negatively affect earnings and banks' ability to lend during times of economic stress.

SNL Image

The standard, known as CECL, requires financial institutions to estimate and record loan losses differently than the current standard. Under CECL, companies estimate expected loan losses at origination, usually causing an increase in reserves to offset those losses.

Several of the largest U.S. banks have provided guidance on how CECL will affect the reserves they hold to offset future loan losses. JPMorgan Chase & Co.'s reserves of roughly $13.5 billion could jump by $6 billion, while at Wells Fargo & Co., reserves could decrease under the standard.

Banks have also said the shift will make it more difficult to lend when the economy weakens. But the Financial Accounting Standards Board, an independent regulatory body that developed CECL, has dismissed those concerns and counter-argued that CECL provides investors with more transparency into banks' lending practices.

The standard was finalized by the board in 2016 and is set to go into effect in 2020 for many institutions. Nevertheless, the banking industry has been seeking every regulatory angle to delay CECL.

The latest effort is a Senate bill that would require the Securities and Exchange Commission to broadly study CECL's potential impact on the economy, while prohibiting federal regulators from enforcing compliance.

But analysts say the bill has a tough path to passage as the narrowing legislative calendar, a toxic atmosphere in Congress and the looming 2020 presidential election make any legislation hard to clear.

SNL Image

Passing any measure in either chamber as a "solo bill," or a bill without any other amendments or provisions attached, has been difficult during this congressional session, Capital Alpha analyst Ian Katz said in an interview.

According to government data, 443 bills were signed into law in the last session of Congress. So far, only 18 have become law this Congress.

A bill must take a long series of steps before it is even considered by the White House. The first step would be to gather co-sponsors, and more importantly Democratic co-sponsors, to convince a key committee chairman that the measure can clear a 60-vote threshold in the upper chamber.

As of May 28, the bill has five co-sponsors, all Republican.

But that task seems enormously difficult, given the hesitation of Senate Banking Committee Chairman Mike Crapo, R-Idaho, to consider the bill.

The biggest hurdle is how little time members have to affect CECL's implementation before it goes into effect for many banks on Jan. 1, 2020, Katz said.

"I'm skeptical. I think what you need is sort of a driving force," Katz said. "There needs to be some sort of impetus or some sort of change in lawmakers that this should become law. Otherwise, I don't see it happening."

But even if the bill fails, making top regulators aware that Congress is watching for whether banks' worst-case scenario becomes a reality would be a win, he added.

Compass Point analyst Isaac Boltansky also said a considerable amount of political will and capital was spent by Republicans in both the House and Senate to pass Dodd-Frank reforms in the last Congress.

"I just don't sense the necessary political alignment ... to believe that this delay will go anywhere," Boltansky said in an interview.

In the House, supporters of a CECL delay would have to convince Maxine Waters, the California Democrat who chairs the Financial Services Committee, to consider taking up the bill. Waters has been an outspoken critic of the banking industry.

"In a lot of ways, the question is with Chair Waters," he said. "It's just incredibly difficult to see how this gets done without Chair Waters pushing it."