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Regional banks submit last-minute CECL proposal to FASB for consideration

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Regional banks submit last-minute CECL proposal to FASB for consideration

A group of superregional banks has sent a last-minute proposal altering the new credit loss model to the Financial Accounting Standards Board, according to a Nov. 5 letter obtained by S&P Global Market Intelligence.

The proposal aims to make certain aspects of the current expected credit loss model easier to understand and more transparent for those who use financial statements. It also seeks a delay of the standard. As expected, the banks proposed keeping the lifetime loan losses approach and splitting the provision for loan losses into several buckets. It is now up to the FASB to make good on a promise to consider the proposal in a public meeting.

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"As we articulated at our Credit Losses Transition Resource Group meeting on Nov. 1, 2018, we will carefully review the proposal submitted by the banks and determine if further action is warranted," said FASB spokesperson Christine Klimek in an emailed statement.

The banks said this proposal will better align CECL with the "matching principle" of accounting, the definition of an expense and the economics of lending, while providing financial statement users with useful, comparable figures. They propose splitting the provision for credit losses into three parts: expected losses within the first year would be recorded in the provision for losses in the income statement; expected losses beyond a year would be recorded to accumulated other comprehensive income, or AOCI; and the lifetime losses of impaired financial assets would be recognized entirely in earnings.

Federal banking agencies could leverage this proposal to mitigate CECL's impact on capital and the unintended consequences that might be passed on to customers, according to the letter. The proposal suggested losses in AOCI would be excluded from minimum capital requirements for advanced approaches firms. Regulators could also adjust existing capital rules to include some CECL losses that are held in AOCI.

To date, banking regulators have proposed a three-year phase-in of CECL's initial capital hit, though many in the industry have argued that will do little to offset the standard's pressure on capital levels.

"It would appear the banks proposing this change are seeking to avoid the deduction of capital above the cap," StoneCastle Financial Corp. Chairman and CEO Josh Siegel wrote in an email. StoneCastle is an investment company that works with community banks; Siegel has previously written about the potential impacts that CECL could have on bank capital levels.

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"I believe the odds are low that FASB would accept this change but it never hurts to ask. I don't believe it would change the reserve amounts determined under CECL, which will still likely be a significant increase from the current level of loan loss provisions," he wrote.

The letter also sought a delay of CECL's 2020 implementation date to conduct a comprehensive quantitative impact study to look at how the standard could influence lending and regulatory capital.

The banks signing on to the letter included Ally Financial Inc., BB&T Corp., Capital One Financial Corp., CIT Group Inc., Citizens Financial Group Inc., Comerica Inc., Discover Financial Services, Fifth Third Bancorp, First Horizon National Corp., Huntington Bancshares Inc., KeyCorp, M&T Bank Corp., OneMain Holdings Inc., PNC Financial Services Group Inc., Regions Financial Corp., SunTrust Banks Inc., Synchrony Financial, Synovus Financial Corp., U.S. Bancorp and Zions Bancorp. NA.

When it first embarked on the credit loss project five years ago, FASB considered an approach that would split the allowance, FASB member R. Harold Schroeder said during the Nov. 1 meeting. At the time, banks said it would be too cumbersome to implement and would add little benefit. As part of outreach to the banks, FASB staff will try to ascertain what has changed in the last five years that made this approach "more operable or cost-beneficial" for banks, he said.

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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 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.