Loan Loss Accounting Study Shows Impact of Pandemic Loans (2)
A study commissioned by Congress into the biggest change in bank accounting in decades dodged the biggest question it faced, accusing the pandemic of making an answer impossible.
The study, conducted by the Treasury and released on Wednesday, concluded that an assessment of whether the current expected credit loss standard (CECL) would make lending more difficult in an economic downturn “ is currently not feasible ” due to the coronavirus pandemic.
“Drawing conclusions now regarding the impact of CECL since its initial implementation in early 2020 is difficult because CECL has not been fully implemented by all entities, and many market factors related to the global COVID-19 pandemic (including government responses) have affected the economy, financial institutions and borrowing and lending dynamics ”, study mentionned.
The Financial Accounting Standards Board, the authors of the accounting rule, said it was studying the report.
The study comes at a time when federal regulators like the Federal Reserve have done everything they can to encourage lending and keep the banks– and the entire financial system – from collapsing at the same time they are required to implement the standard.
The standard, which most publicly traded banks began to follow in January, fundamentally changes how SOEs estimate and record loans and other financial instruments on their books. CECL forces companies to recognize losses and reserve cash to cover those losses when making these loans, instead of waiting until they are likely to lose money. It is considered the central response of accounting executives to the 2008 financial crisis.
Congressional aides confirmed to Bloomberg Tax on Wednesday that they had received the study.
Rep. Brad Sherman (D-California), a longtime critic of the norm, called “bad accounting” of the CECL and that it is about a “deviation from the accounting of historical events and an adventure in the prediction of the future”.
“In this new Treasury Department report, we are told that answering the key Treasury question is legally required to answer” is not currently feasible. ” This is yet another indication that the implementation of the CECL standard should be halted, ”Sherman said in a statement to Bloomberg Tax.
Banks, credit unions and some legislators having plagued against the new rule, saying it would force banks to dry up loans during an economic downturn, when customers need money most.
Lawmakers introduced several bills in 2019 to delay the new standard or remove it altogether. The insertion of an obligation for the Treasury of study the accounting rule in Congress’s year-end expense bill was seen as a key victory for opponents of the new normal.
The layout, nestled in a committee report accompanying the legislation on end-of-year expenditure (Public law 116-93), demanded that the ministry “conduct a study on the need, if any, to amend the regulatory capital requirements of the CECL, and submit the study to the Committee within 270 days.”
Michael Gullette, senior vice president of the American Bankers Association, said he agreed with the assessment that it was too early to determine the full impact of the accounting standard, but it was clear that the estimates required under the CECL are complex and expensive.
The standard should be “considered throughout the business cycle to ensure that credit will remain available during times of stress, especially for low and moderate income borrowers,” Gullette wrote in an email.
While the Treasury study did not definitively weigh in on whether the bookkeeping hurt banks, it said the Treasury “recognizes the seriousness of the concerns that have been raised about the potential effects and implications of the CECL. on regulatory capital, lenders, borrowers and the economy. . “
He also said Treasury “supports the objectives of CECL – including providing users of financial statements with more forward-looking information and accounting for assets in the financial statements in a way that reflects the amounts expected to be collected.”
Notably, the report asked the FASB to explore aligning the timing of accounting for charges associated with financial assets under GAAP with the earlier recognition of potential credit losses under CECL – a long-standing criticism of bankers in the past. with regard to the accounting rule.
“Although CECL results in early recognition of potential credit losses, GAAP does not provide for early recognition of income associated with financial assets. Conceptually, deferral and amortization of expense recognition, in particular, is not fully consistent with the initial recognition of expected lifetime credit losses under CECL, ”the report states.
The FASB has launched a autopsy of the accounting standard and plans to hold a public meeting in early 2021 to hear questions and comments from bankers, accountants and investors on the new accounting rule. It also analyzes quarterly reports and listens to earnings calls to understand how accounting affects lenders, FASB officials said at an American Institute of CPA banking conference on Tuesday.
While large institutions have already implemented the CECL, private banks, credit unions and small publicly traded banks have until 2023 to adopt the new accounting standard.
The FASB has said it will assess how large banks follow the standard and determine whether it needs to make any changes before smaller institutions do.
The study confirmed that CECL will affect financial institutions in different ways, depending on a given institution’s business model, as well as its credit modeling, risk management and related accounting practices, among other factors.
As a result, the financial institution’s implementation of CECL will likely also have an impact on its regulatory capital ratios, according to the study.
Ultimately, the ministry recommended that the FASB “intensify its efforts to consult and coordinate with prudential regulators when considering possible future changes to the CECL.”