Current Expected Credit Loss: The Pot is Still Stirring


The banking industry and its allies in Congress have been outspoken in their fierce opposition to CECL since the broad outlines became clear, well ahead of FASB’s formal promulgation – its Accounting Standards Update (Topic 326) – in June 2016. However, the last few months of 2018 saw a marked intensification of that hostility. Blaine Luetkemeyer, R-MO, garnered frequent attention as Chairman of House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit. The start of the New Year, along with the new Congress, represents a good time to review these recent CECL developments and to anticipate the next big battle.

  • On 9/4/18 the subcommittee chairman held a CECL Roundtable in which multiple federal regulators and banking industry reps took part. Everyone reiterated CECL support or criticism along well-established lines.
  • On 10/17/18 the Bank Policy Institute sent a letter to Treasury Secretary Mnuchin, signed by the nation’s 48 largest banks, deploring what they insisted would be CECL’s inevitable damage to the availability, term and pricing of credit in times of economic contraction. BPI requested that FSOC conduct a full-scale study of the threat.
  • On 10/24/18 the subcommittee chairman and other Republican members likewise wrote the chairmen of the federal financial agencies and FASB to note the dire predictions that had come from bankers at the September Roundtable – especially the alleged threat to residential mortgage lending. The congressmen called for a new quantitative impact study conducted jointly by the agencies and FASB – and a consequent postponement of CECL’s effective date.
  • On 10/24/18 Senator Thom Tillis, R-NC, wrote the same agency chairmen to accuse FASB of never having conducted an appropriate impact study on CECL and to demand that such a study be undertaken at once by an independent third party. The Senator made special mention of perceived threats to residential mortgage, small-business and subprime lending. (Tillis sits on Senate Banking.)
  • On 10/31/18 the American Bankers Association submitted yet another letter of CECL opposition to the Treasury Secretary. This time, however, the letter was co-signed by all 50 state banking associations, entities that had been largely silent on the topic previously.
  • On 11/15/18 FASB issued two “narrow-scope improvements” to CECL, by which the implementation date for non-public businesses was simplified and receivables from operating leases were placed out of scope.
  • On 12/11/18 the subcommittee chairman led a snap hearing in which a succession of industry witnesses pummeled the upcoming CECL standard and demanded that FASB open itself up to public meetings on the topic. No one spoke in favor of CECL.
  • On 12/19/18 FASB announced plans for just such a public meeting at Norwalk headquarters In January; date to be announced. A great many regional and community bankers expressed immediate interest in addressing the meeting. Only a small minority of applicants will have the opportunity.
  • On 12/21/18 the subcommittee chairman and other Republicans sent new and vehement anti-CECL letters to the SEC and FASB chairmen.
  • On 12/21/18 the subcommittee chairman also introduced H.R. 7394, a bill under which no federal financial regulator would have authority to require anyone to comply with the “CECL Rule.” The bill will have to be reintroduced in the new Congress.
  • On 1/3/19 the 116th Congress convened, with House Republicans becoming the Minority. Presumably, William Lacy Clay, D-MO, Ranking Member on the Subcommittee in the previous Congress, will become Chairman.
  • On 1/8/19 the U.S. Chamber of Commerce wrote the SEC and FASB regarding the serious concerns that its broad membership had expressed about CECL’s impact on credit availability. The Chamber demanded a careful reexamination involving robust field testing of the proposed standard.
  • On 1/9/19 FASB announced the date for its public meeting – 1/28/19. Public-observer seating was oversubscribed within minutes. The list of speakers has not yet been released. It will no doubt be a heated and angry affair.

Despite Opposition, CECL Implementation Still on the Horizon

Congressional and industry opponents have sufficiently framed the issue in a way that could mean a delay in CECL’s effective dates, if not a change in CECL’s prescriptions. It remains to be seen what direction the new House Majority decides to take. Certainly, it was difficult to find enthusiasm for CECL anywhere in the last Congress. Opponents will likely continue to stress the supposed threat to residential mortgage lending – the issue that has commanded the widest attention, so far.

Opponents may also be aided by new expressions of concern from institutional investors about the very utility of CECL. On 11/27/18 Franklin Templeton Investments wrote FASB to complain that CECL financial statements would be less reliable than present statements, that CECL would increase the deployment of non-GAAP financials and that it would thereby undermine consistency in reporting across the banking industry. On 12/14/2018 Capital Group wrote similarly; it said that CECL financial statements would be more judgmental than present statements and would make credit and comparability analyses more difficult. On 1/11/19 FIG Partners, the Atlanta-based investment bank, published a survey of 53 non-bank institutional investors, 75% of whom disagreed or strongly disagreed with the rule change.

Despite all the determined opposition, it is hard to imagine that CECL simply goes away. The US cannot set CECL aside without disconnecting from best practices elsewhere in the developed world.

FASB could certainly lessen the eventual CECL burden, however. One obvious option, though unpleasant for the Board, would be to conform CECL with IFRS 9, the standard that the IASB made effective last January for Canadian and European banks and US dual-filers. IFRS 9 requires only 12-month loss estimates on stable, performing loans – the very large majority of loans – versus CECL’s prospective life-of-loan loss estimates on all loans.

Stay tuned!


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