Will industry get what it wants on CECL?

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A plan to change the accounting standard for recording loan losses is facing heightened uncertainty.

The Financial Stability Oversight Council discussed the pending Current Expected Credit Loss standard, widely known as CECL, in a closed-door executive session Wednesday that ran significantly longer than its scheduled 45 minutes.

The lengthy discussion has provided CECL’s critics with renewed hope their calls to delay conversion to the new standard may be gaining traction in the halls of power.

CECL detractors wasted no time seeking to spin FSOC’s scrutiny to their advantage.

A group opposed to CECL issued a joint statement earlier Wednesday urging the council to press the Financial Accounting Standards Board to push back a scheduled Jan. 1, 2020, implementation date.

“We urge policymakers — at a minimum — to pause, study and understand the very real impact CECL could have before deciding whether to move forward,” the group wrote.

The group included the American Bankers Association, Consumer Bankers Association, Bank Policy Institute, Credit Union National Association and National Association of Federally-Insured Credit Unions.

Their letter came a day after 28 Republican members of the House of Representatives “implored” Treasury Secretary Steve Mnuchin to use his influence “to delay CECL’s effective date until … comprehensive analysis on this standard has been completed.”

Lawmakers in the House, including two prominent Democrats, voiced sharp criticism of CECL last week during a House Financial Services subcommittee meeting.

FSOC is well within its purview to examine CECL, said Curt Long, NAFCU’s chief economist and vice president of research.

“I think we all appreciate that FSOC considered the issue,” Long said. “It has broad implications for all financial institutions and for the stability of the system.”

Whether FSOC decides to intervene remains unclear. Some outside observers, most notably Capital Alpha Partners analyst Ian Katz, believe that layering FSOC’s scrutiny on top of growing opposition in Congress could make it tough for FASB to stand pat.

“We think the council has a bully pulpit that will be difficult for the FASB to ignore,” Katz wrote in a Friday research note. “The FSOC, which is led by … Mnuchin and includes the heads of the Fed, OCC, FDIC and SEC, is almost surely sympathetic to the banks’ complaints that CECL is procyclical.”

Senior Treasury officials noted Wednesday that FSOC has mentioned the standard in two consecutive annual reports, adding that the agency would continue to monitor the issue. They declined to provide details about what was said during Wednesday’s executive session.

Banking regulators are pursuing a plan to cushion the impact CECL is expected to have on capital levels. On Tuesday, the FDIC approved a rule that allows banks to phase in any adverse capital effects linked to CECL over three years.

The FASB developed CECL after concluding in the wake of the financial crisis that financial institutions waited too long to begin building loan-loss reserves. CECL would require depository institutions to take a more forward-looking approach and forecast lifetime credit losses as soon as a loan is booked.

Banks and credit unions have argued that economic forecasting is notoriously difficult, and that CECL will promote deeper cuts to lending during slowdowns, as well as sharper increases during expansions.

The current incurred-loss standard permits recording an allowance only after credit deterioration becomes apparent.

While the FASB has given no indication that it will consider delaying CECL, the group appears increasingly open to a proposal introduced last month by a group of regional banks to shift virtually all projected credit losses off of balance sheets.

The FASB agreed Wednesday to host a public roundtable in early January to discuss the bankers’ proposal. The meeting would also address other implementation issues, including the FASB’s plan to require banks and credit unions to break out chargeoff and recovery data by vintage.

“The roundtable will provide stakeholders yet another opportunity to discuss cost-effective issues they believe the board should address,” Chairman Russell Golden said in a Wednesday press release.


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