The chair of a key House subcommittee signaled he may advance legislation to strike down a new accounting standard that has raised controversy in the banking industry.
Rep. Brad Sherman, D-Calif., said he is searching for a way to attach a CECL-killing bill to a larger piece of legislation should evidence reveal that the standard causes significant economic harm. The chair of the House Subcommittee on Investor Protection, Entrepreneurship and Capital Markets made the comments during a Jan. 15 hearing.
The current expected credit loss standard went into effect for large companies on Jan. 1 and changes how they account and record provisions for loan losses. It requires institutions to set aside reserves for lifetime expected losses on loans, available-for-sale debt securities and other amortized assets and recognize them at origination.
Sherman said it is important to study the impact of the standard created by the Financial Accounting Standards Board, an independent organization that establishes accounting and reporting standards. "Our ability to pass legislation will depend upon what people see as the effect [of CECL]," Sherman said in an interview.
The CECL debate centers on whether the standard will make it more difficult for banks to lend during times of economic stress. Since banks are required to reserve the entire amount of a loan at origination, CECL could cause banks to set aside cash in reserves, which would result in even fewer funds to loan during a downturn.
But FASB has argued that the issue of procyclicality is not a factor in its decision-making. The organization's role is to set accounting rules to provide better insight into how institutions hold or make loans, FASB Chairman Russell Golden said before the House subcommittee.
Rep. Blaine Luetkemeyer, R-Mo., Congress' most vocal CECL critic, expressed his frustration with Golden and FASB for the lack of a comprehensive economic study of the standard prior to its finalization in 2016 and its effective date.
"You didn't talk to the real people in the real world who are going to feel the effects of this [standard]," Luetkemeyer said. "A simple accounting standard is going to hurt the ability of people in my district to be able to get a loan."
In 2019, the Missouri congressman made several concerted efforts to educate other members, stop the standard from taking effect and force the federal government to complete a comprehensive economic analysis of the standard.
Congress managed to include a provision in a massive year-end spending bill that requires the Office of Financial Research at the Department of the Treasury to study CECL's effects on the economy, which is due back to Congress in mid-September.
But while Golden said FASB would help Treasury if asked, he said his organization did complete a CECL cost-benefit analysis "in connection with our mission."
"We believe CECL should be implemented and that data that will come from implementation will help improve the study," Golden said. "We believe that CECL improves the information to our capital markets."
The chairman further defended CECL, saying it provides a clearer window into lending practices for investors and regulators alike. He said that after the financial crisis, FASB was pushed by banking regulators, investors and global authorities to focus efforts on expected credit losses to help mitigate a future crisis.
Golden said CECL was designed to be neither procyclical nor countercyclical and that it is up to banking regulators to adjust regulatory capital requirements should CECL cut into available funds.
"We took on CECL because there is evidence that the incurred loss model delays recognition, created procyclicality and caused confusion," Golden said.