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FASB

Banks Pressure Federal Regulators for Changes to Credit Losses Standard

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

A trade group representing large U.S. banks called on the Financial Stability Oversight Council (FSOC) to delay the implementation of the FASB’s credit loss accounting standard. The group called the standard a risk to the financial system. The plea is the latest sign that banks are increasing the pressure on the FASB and regulators to make changes to the standard or delay when banks must follow it.

A trade group representing large U.S. banks on October 17, 2018, requested that financial regulators delay the biggest change to bank accounting in decades or risk imperiling the financial system.

The Bank Policy Institute wrote about its concerns to the Financial Stability Oversight Council (FSOC), a Dodd-Frank Act panel chaired by Treasury Secretary Steven Mnuchin that monitors financial stability. The trade group said the FASB’s Accounting Standard Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, would magnify bank losses during an economic downturn, which could curtail lending and hurt bank earnings.

“We believe that the implementation of CECL could undermine financial stability in a future recession or financial crisis, as its requirements establish disincentives for banks to extend credit during stressed economic conditions,” the BPI wrote. The group called on the FSOC to work with the FASB to delay the standard’s effective date and study the economic impact of it.

“As CECL is not yet effective, there is sufficient time to delay implementation to further study its shortcomings and mitigate its unintended consequences,” the group wrote. A copy of the letter was sent to the FASB.

The FASB said it planned to respond to the letter, but made no commitment to act on the bankers’ recommendations.

“Since issuing the credit losses standard in 2016, the FASB has continued to meet regularly with banking institutions and banking regulators alike. We will continue to work with these organizations to ensure a smooth and effective implementation of the standard, and stand ready to answer any questions as they arise,” a FASB spokesperson said.

The credit loss standard, published almost eight years after the financial crisis, calls on banks and other businesses to estimate future losses on loans as soon as they are written. It was issued as a response to complaints from investors, regulators, and bankers that U.S. GAAP forced a delayed recognition of the losses on bad loans and securities. The problem was aggravated by the 2008 financial crisis. U.S. GAAP requires estimates of losses only after there is evidence that they have happened, which meant bank financial statements appeared rosy as the mortgage market was imploding.

ASU No. 2016-13 does not specify a method by which banks must make these loan loss calculations; they are expected to look to the foreseeable future and make reasonable and supportable estimates. Depending on how well the economy fares, banks expect their loan loss provisions to swell under the new accounting. Banks also are worried about making forecasts and using judgments to make the sensitive estimates. The standard starts to go into effect in 2020 for large banks.

“The whole banking system is built on trust and confidence,” said Michael Gullette, a vice president at the American Bankers Association. “CECL, with its long-term forecasts and the unreliability of long-term forecasts, it kind of takes away a layer of trust offered to investors.”

When a bank has to increase its loan loss reserves, it must raise new capital at a time when its funding costs may be rising. Banks may also become somewhat more reluctant to originate new loans while their capital ratios are fluctuating.

“Anything that introduces less reliability and less confidence introduces volatility,” Gullette said. “You have volatility, you have to put it in your capital plan. If you have to maintain capital, you can’t invest it. You can’t lend.”

The Bank Policy Institute letter was submitted after months of bank industry pressure on the FASB and regulators to either peel back the standard’s requirements or delay its implementation date until the board or regulators conduct an economic impact study of the guidance. (See Banks, Lawmakers Push for Changes to Credit Loss Standard in the September 19, 2018, edition of Accounting & Compliance Alert.)

During the third quarter earnings call to investors, BB&T Corp. Chairman and CEO Kelly King called the standard “a really big deal” and urged listeners to call Congress or regulators to stop its implementation.

“I mean, the banks will be able to survive it but the problem is, if it goes into effect as now projected, it’s really bad for the economy,” King said. “It’s really bad for consumers. It’s really bad for business. It is not the right thing to do, and so we are asking FASB to slow down, take a breath. Let’s study this carefully, and let’s see what the real impacts are and likely. Let’s make some adjustments.”

A Treasury spokesperson said department officials were reviewing the Bank Policy Institute letter but had no additional comment.

For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP — Financial Instruments-Impairment , also on Checkpoint.

Additional analysis of the credit loss standard can be found on Checkpoint at Accounting and Auditing Update Service [AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service [SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.

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