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FASB

Lawmakers, Bankers Turn up Heat on Credit Losses Standard

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Lawmakers and bankers at a House subcommittee hearing repeated criticisms about the FASB’s much-watched credit losses standard, saying the rules — slated to start taking effect in 2020 — will force banks to shore up regulatory capital and curb lending in a tight economy. The FASB was not invited to testify, but board Chairman Russell Golden defends the new standard and the process by which it was written.

If the FASB does not significantly change its credit losses accounting standard before it goes live, the board needs to kill it, the CFO of Capital One Financial Corp. told lawmakers on December 11, 2018.

Speaking at a House Financial Services subcommittee hearing, Scott Blackley repeated criticisms banks and others have lobbed at the FASB’s far-reaching current expected credit losses (CECL) standard, saying the new rules will force banks to hoard regulatory capital and curb lending in a tight economy.

“A lot of work Congress has already done after the financial crisis with Dodd-Frank, and the stress testing regime, and other capital standards have broadly already dealt with all the problems CECL was initially intended to deal with,” Blackley said. “At this point, my view would be the best course of action is to just eliminate CECL.”

Two other witnesses joined Blackley in his criticisms of the FASB’s Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Joseph Stieven, president of Stieven Capital Advisors LP, and a former member of the FASB’s Investor Advisory Committee (IAC), and Bill Nelson, chief economist at the Bank Policy Institute, an industry trade group, decried what they described as the complexity of the rule and FASB’s lack of economic analysis before mandating banks to apply it.

“In my view, this model will definitely impact the availability of credit,” Stieven said.

The FASB was not invited to testify and defend the standard it had spent a good part of a decade developing.

Mark Zandi, chief economist of Moody’s Analytics, was the lone voice on the panel to back the standard, saying forcing banks to think about expected losses could discourage them from engaging in the type of risky lending that contributed to the 2008 financial crisis.

“I think CECL adoption will lead to a stronger, safer economy,” Zandi told members of the subcommittee on financial institutions and consumer credit.

But the overall tone of the hearing was negative. In addition to the testimony from three opponents of the FASB’s standard, Republican and Democrat lawmakers took aim at the details of the new standard, the process by which it was written, and the FASB members themselves.

Rep. Barry Loudermilk, a Georgia Republican, called the FASB “ivory tower bean counters.” Rep. Blaine Luetkemeyer, a Missouri Republican, referred to the board as “fools.”

“Because the rule was never done according to their own rules, if I were sitting here and they were trying to ram these [rules] down my throat, would I have legal recourse against these fools for rules that were improperly done?” Luetkemeyer asked the panel.

California Democrat Rep. Brad Sherman, who is not a member of the subcommittee but was invited to participate because he is a CPA, said the FASB needed to do more analysis of the standard before allowing it to go live.

“We need to see FASB provide quantitative impact studies and field testing before they turn the economy or any sector of the economy on its head,” Sherman said.

Speaking to reporters on the sidelines of the AICPA’s Conference on Current SEC and PCAOB Developments on December 12, FASB Chairman Russell Golden defended the FASB’s work and analysis on the new standard.

“We think we followed our process, and the board did determine the benefits justify the costs,” Golden said.

Much of the criticism at the December 11 hearing revolved around how the standard will make banks recognize future losses on a loan on the day it is written. Because banks expect to have to beef up their provisions for loan losses as a result, they expect to have to also increase their regulatory capital. When banks increase their capital levels, they have less money available to lend to customers.

In addition, opponents say the standard will force banks to curtail lending to riskier customers.

“Under CECL, the bank would recognize all expected future loans losses when the loan is originated and before even the first dollar of revenue is recognized, reducing bank capital immediately,” Blackley said. “This accounting distorts the economics of lending and disadvantages lending to those with less than perfect credit.”

The higher the perceived credit risk, the higher up-front losses a bank must book. This means banks could be less likely to lend to customers with bad credit, he said.

In Golden’s view, however, the credit losses standard does not explicitly require banks to predict the future. Instead, they must look to the “foreseeable” future and then revert to historical experience to set aside losses.

“You don’t forecast over the life of the loan. You forecast as long as you can,” Golden said. “And then you revert to your historical information.”

As a private-sector body that receives most of its funding through accounting support fees collected from public companies, as established under Section 109 of the Sarbanes-Oxley Act of 2002 , Congress does not hold the FASB’s purse strings, and the board is not beholden to lawmaker action. That does not stop outside parties, including Congress, from pressuring the FASB to act, however. The FASB’s four-decade history has included periods of intense scrutiny from lawmakers on everything from fair value measurement to how companies report the costs of stocks they pay to workers.

If Congress is serious about turning up the heat on the FASB, a committee typically will ask a representative of the board to testify. The fact that the FASB was not part of the December 11 witness lineup signals that the hearing may have served more as a venting session as opposed to a discussion designed to force the FASB to act.

Still, rules produced in the FASB’s Norwalk, Connecticut headquarters typically do not spur debate in the halls of Congress. The existence of the hearing shows the importance of the board’s accounting standard and how big of a change banks believe it will bring.

Published in June 2016, ASU No. 2016-13 is considered the FASB’s chief response to the 2008 financial crisis. It goes into effect for publicly traded businesses in 2020. It nixes current GAAP’s restrictions against using forward-looking information to calculate losses on loans. This prohibition came under fire in the lead up to the financial crisis as banks saw losses looming but their balance sheets remained rosy.

Banks have been upping pressure on the FASB, regulators, and lawmakers in recent months to either change parts of the credit losses standard or stall its implementation. Several groups have tried appealing to the Financial Stability Oversight Council (FSOC) to force a delay of the standard’s effective date. Separately, a group of mid-sized banks, including Capital One, have asked the FASB to change key parts of the standard. (See FASB Deals with Familiar Eleventh-Hour Pressure to Change Credit Losses Standard in the December 3, 2018, edition of Accounting & Compliance Alert.)

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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