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Regulators take up CECL in year-end meetings

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Regulators take up CECL in year-end meetings

U.S. financial regulators discussed a controversial new loan loss accounting method in year-end meetings, but it is unclear whether they will give banks any relief as implementation looms.

The current expected credit loss standard, also called CECL, appeared on December meeting agendas of the Federal Deposit Insurance Corp. and Financial Stability Oversight Council. Both groups discussed the standard in closed sessions, and the FDIC passed a rule at the conclusion of its Dec. 18 meeting that allows banks to phase-in the initial capital impact of CECL over three years. FSOC is meeting Dec. 19 and added CECL to its agenda after a bank group asked the council to intervene, saying the standard threatens the industry's stability.

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The Bank Policy Institute, a nonpartisan public policy, research and advocacy group that represents some of the largest banks in the country, wrote to FSOC in an Oct. 17 letter expressing concern that CECL will undermine financial stability in future economic crises or recessions. The group asked FSOC to delay the standard, conduct a study on the standard's impact on lending and consider industry-proposed changes.

The group said that CECL disincentivizes lending during a recession because losses are booked at origination while the income is reported on a quarterly basis. Loans are immediately dilutive to capital without recognition of the interest income that compensates for the risk. The BPI also said that CECL is "highly procyclical" and would amplify or exacerbate an economic downturn.

Bank advocacy groups, including the Bank Policy Institute, said in a Dec. 19 statement that they were encouraged that the council would look into CECL. They said a review of the standard is warranted given the magnitude of the change and potential risks, and again urged a delay.

For some, seeing the CECL item on FSOC's agenda was a cause for concern.

"When this noise started a while ago, I didn't know if this very detailed technical issue was going to make it all the way to an FSOC meeting," said Mayra Rodriguez Valladares, managing principal of financial consulting firm MRV Associates, who referred to the Bank Policy Institute as a lobbying group. "The lobbyists are trying to convince an entity that's supposed to be about the safety and soundness of the financial system … to lobby against the very interest that it is supposed to protect."

Many of the regulators that make up FSOC are already involved in implementing CECL. The Securities and Exchange Commission empowered the nongovernmental Financial Accounting Standards Board to create U.S. accounting rules like CECL, and bank regulators routinely have representatives at meetings to discuss implementation issues. FASB is not a member of FSOC, and a representative said no one from the board will be in attendance.

While the banking industry may see the FSOC attention as a small victory, regulators have so far offered little tangible relief beyond the capital phase-in.

American Bankers Association President and CEO Rob Nichols said in a Dec. 18 statement that the implementation phase-in "does not go far enough" to ensure that CECL will function as intended. He said he was "encouraged" by the number of policymakers interested in CECL and concerned about its potential downside and that the ABA will continue appealing for a delay and "thorough review" of the standard's impact before its effective date.

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Click here to read more of our coverage on how banks are complying with CECL and IFRS 9.

Click here to read 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.