Big banks told investors they are prepared to overhaul their loss accounting approaches even as some repeatedly asked regulators to delay the standard.
Bank have less than 18 months before the current expected credit loss model, or CECL, goes into effect for companies that file with the Securities and Exchange Commission. In earnings calls, executives said their institutions were progressing with implementation. Many of those institutions, however, also joined recent efforts seeking changes to the standard or an outright delay. Some think CECL could increase their allowances in certain cases.
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The allowance will likely increase at Bank of America Corp., CFO Paul Donofrio said. The final number, however, will depend on regulatory and accounting guidance as well as the economic outlook at the time, he said. Wells Fargo & Co. CFO John Shrewsberry plans to disclose the expected impact sometime in 2019 and said the standard "tends to increase" the allowance for consumer loans and "tends to decrease" it for commercial loans. He added that CECL has yet to shift lending competition, either in loan terms or in pricing, but those effects could emerge as more banks quantify the impact.
Citigroup Inc. CFO John Gerspach said the final allowance figure will be on the upper end of the bank's previous guidance of a 10% to 20% increase, and that some portfolios currently carry excess reserves while others are under-reserved. M&T Bank Corp. CFO Darren King said the bank does not expect CECL to meaningfully change its capital ratios "in either direction" when the standard goes into effect.
Some executives, like Synchrony Financial CFO Brian Doubles, highlighted credit cards loan losses as being "fairly challenging" to model under CECL. He said most card issuers expect their portfolios to see an increase, but that differences in the ways they allocate payments could make it difficult to determine the life of these revolving products.
JPMorgan Chase & Co.'s card portfolio could be one of the largest drivers of its allowance, given its size and the revolving, open-ended nature of the portfolio. CFO Marianne Lake said it was "not implausible" that reserves could increase between 20% and 30% across the bank space, as some industry analysis has suggested.
Even as these executives provided updates on their progress toward a 2020 effective date, some banks participated in a letter-writing campaign to seek a delay of the standard. For the last several months, a number of big banks signed onto a series of letters sent to agencies such as the prudential bank regulators, the Financial Stability Oversight Council and the Financial Accounting Standards Board. These letters encouraged regulators to neutralize the standard's impact on capital, asserting that it will change the economics of lending by reducing credit and shortening maturities for longer-duration loans. Many of the letters sought a delay of the standard so regulators could conduct a quantitative impact study.
Executives said during calls that they believe CECL could pose a threat to economic stability and might not work as designed in a financial crisis. JPMorgan Chairman and CEO Jamie Dimon said the standard is procyclical, causing a timing lag between loan losses and the related allowance level.
BB&T Corp. CFO Daryl Bible, who has been particularly vocal among bank executives, said the standard is in conflict with certain accounting principles and the realities of lending. He added that CECL would have performed poorly during the Great Recession and called it a "huge risk to the country" and economy.
Click here to read more of our coverage on how banks are complying with CECL and IFRS 9. Click here to read S&P Global Market Intelligence's analysis of CECL's impact on the industry as part of our updated five-year outlook, and here about how CECL may have fared during the Great Recession. |


