NORWALK, Conn. NCUA joined bank regulators late Friday to endorse the controversial accounting proposal issued by the Financial Accounting Standards Board which is expected to require credit unions and banks to set aside more loan loss reserves.
“We believe the Current Expected Credit Loss model proposed in the Exposure Draft is consistent with the fundamental principles necessary to address the defects identified during the financial crisis in the current impairment models,” wrote the regulators in comment letter sent to FASB by NCUA, the FDIC, the Federal Reserve, and Comptroller of the Currency, all members of the Federal Financial Institutions Examination Council
The endorsement by the federal regulators for the FASB’s Credit Losses for Financial Instruments comes as the proposal to require credit unions and bank use a single "expected loss" measurement for the recognition of credit losses, is being universally panned by credit unions and banks.
The proposal is aimed at resolving a major criticism of accounting for loan losses during the financial crisis, which focused on the historic conditions related to losses. The FASB proposal would take into a consideration broader group of variables, including future regional and national economic trends, as well.
Credit unions and banks deluged the FASB over the past few days with hundreds of comment letters saying the proposed method measuring loan losses as too subjective and could be costly to implement, first because of the additional time and expertise it would entail and because it will most likely require greater reserves, thus eating into income and capital. About half of the 320 comments received on the proposal came from credit unions.
But the regulators are unambiguous in their support, saying the eventual benefits of the proposed method will outweigh its costs. “The Agencies agree that when expected credit loss measurements include consideration of the effects on collectability of future conditions derived from reasonable and supportable forecasts, these estimates will provide more decision-useful information than estimates produced under existing U.S. GAAP,” the regulators said in their comment letter.
“Under current GAAP, entities are limited to considering past events and current conditions when estimating credit losses,” they wrote. “However, consideration of reasonable and supportable forecasts about future conditions are fundamental to sound credit risk management practices, and the Agencies believe all information used for credit risk management purposes is relevant to making an estimate of expected credit losses.”
The regulators agreed that some kind of accommodation should be made for smaller entities in developing a credit loss model. In fact, NCUA sent a separate letter to the FASB Friday afternoon urging the accounting rule-setters to provide some kind of leeway for small- and medium-sized credit unions.
