Dive Brief:
- The Financial Accounting Standards Board (FASB) voted Wednesday to delay by a year, for most banks, the effective date of sweeping new standards, called current expected credit losses (CECL), that govern how to account for expected losses over the life of a loan. Big, publicly traded banks (those that file with the Securities and Exchange Commission) still have to meet their original effective date, January 2020.
- The delay only kicks the can down the road, the American Bankers Association (ABA) said. And the Credit Union National Association (CUNA) reprised its past criticism that its members should not be subject to the standards.
- The board's action comes after legislation was introduced in Congress directing the FASB to further study the impact such changes would have on financial institutions before moving forward.
Dive Insight:
The new CECL standards are intended to replace the incurred-loss method banks use today with a far more stringent requirement, which measures expected credit losses over the life of a loan at the time it's recorded based on historical experience, current conditions and forecasts.
Banks also are expected to provide enhanced disclosures on the estimates they use to forecast their credit losses, and they're directed to use amended accounting procedures for certain types of securities and other financial instruments.
"The new guidance aligns the accounting with the economics ... and [provides] investors with better information about those losses," Russell Golden, chair of the FASB, said in 2016, when the standards were approved.
In its vote Wednesday, the board pushed back the effective date of the changes by a year for most financial institutions. Big, publicly traded banks still have to meet the January 2020 effective date.
ABA President Rob Nichols, in a statement Wednesday, called on the FASB to reconsider implementing the standards. "A partial delay without a requirement for study or reconsideration ... does not reduce the ongoing data, modeling and auditing requirements facing smaller banks or address the increased procyclicality it will cause," he said.
CUNA said the delay is welcomed, but continues to question why the standards are being applied to credit unions.
"Application of CECL to credit unions is inappropriate," the group said last month. "CECL is intended to address delayed recognition of credit losses resulting in insufficient funding of the allowance accounts of certain covered entities. However, underfunding of allowance accounts has not generally been an issue for credit unions. Further, the typical user of a credit union's financial statements is not a public investor — such as with large, public banks — but instead is the credit union's prudential regulator, the NCUA."
Joseph Breeden, CEO of Prescient Models LLC, an analytics consultancy, defended the FASB standards in a commentary this month in American Banker. Industry concerns can be addressed with adjustments in a few areas, such as the treatment of long-term mortgages, he said, adding that banks, had they used the standards a decade ago, stood a better chance of catching troubled loans before they contributed to the economic downturn.
"There's no need to throw out CECL entirely as many have called for," he said. There are "ways to improve what's already on the table ... so that the industry can reap the many potential benefits while better protecting institutions and customers."
The FASB said it would consult with the largest banks, regulators and auditors to identify areas of concern as they move forward.
