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Capital One CFO says capital framework may require CECL update

Bank regulators may want to consider updating the U.S. capital framework to accommodate the impending credit loss standard, said Capital One Financial Corp. CFO Richard Scott Blackley.

During a June 13 investor presentation, Blackley continued the criticism of the impending credit loss approach, called the current expected credit loss standard, or CECL, that he voiced during the company's first-quarter earnings call. This time, he said the standard change will impact targeted returns on equity and could restrict lending during a financial crisis. CECL will require banks to reserve for lifetime losses at the time of loan origination.

"CECL ... clearly doesn't change the cash flows of the business," he said. "But if it changes the capital that we have to hold against the business, then it does change the returns that we need in order to earn the same return on capital."

Regulators built the current bank capital regime around a credit loss model that required banks to book losses when they became probable. Blackley said it seemed "logical" that if the accounting board wants banks to bring more of their loss content onto the balance sheet as reserves, regulators should adjust the existing framework to accommodate it. Blackley also believes that CECL will restrict lending during a recession, because banks will have to build full reserves when adding any loan growth.

Regulators are soliciting feedback on a proposal that would phase in CECL's initial capital hit over three years. The proposal does not include any adjustment to the capital regime; however, he said this is a chance for banks to tell regulators how CECL will impact their capital levels.

"That's out there. It's time for all of us, if we want to have an impact on how the Fed thinks about this, to provide our input," he said.

He said Capital One is considering how CECL will impact various aspects of the bank's lines of business and has yet to make any "substantial" decisions around its model. Executives may need to reconsider their return targets as the standard plays out after the 2020 effective date.

The bank's capital position came into focus recently after executives announced that the bank would hold more capital ahead of the 2018 Comprehensive Capital Analysis and Review. Blackley said the Federal Reserve modeled for "materially more severe" conditions for credit card and subprime auto loans, two of Capital One's bigger businesses.

However, the accounting standard could give Capital One an edge when it comes to auto lending. Blackley said the space remains competitive, but few banks are willing to undergo the "growth math saga" that Capital One deployed after the financial crisis by originating a significant number of new accounts that then seasoned and matured. That approach would be "supercharged" under CECL, and competitors may not want to book those loans' lifetime losses before receiving any revenue.

"There's a bit of potential for CECL keeping folks out of wanting to grow too quickly, just in terms of their ability to absorb the unconfirmed losses," he said. "You book losses on loans before you get $1 of revenue."