Bankers are stepping up attacks on a controversial plan to change how they set aside funds for loan losses.
American Bankers Association President Rob Nichols fired the newest salvo at the Financial Accounting Standards Board's Current Expected Credit Loss standard, or CECL. Nichols, in a letter to FASB Chairman Russell Golden, said banks have major problems with the proposal, adding that his group doubts "whether CECL can be adopted in a manner that is acceptable to all parties."
Nichols' comments represent a noteworthy change in tone for ABA, which had largely muted its criticism of CECL, focusing on a behind-the-scenes effort aimed at making the proposed standard as palatable to banks as possible.
Nichols public critique echoes that of the Independent Community Bankers of America, suggesting that regulators and auditors would transform CECL into a burdensome compliance mandate by requiring large amounts of data and complex modeling to validate early stage loan-loss projections called for by CECL.
"We believe the goal of scalability is linked to simplicity," Nichols wrote. "It is difficult to see how most community banks can implement a non-complex CECL model that will pass audit or examination muster. … As a result, we are concerned there could be substantial cost burdens not only at implementation, but also subsequent to implementation as a result of audits and examinations."
CECL "has been on our radar screen for some time, as a number of state regulators have been hearing from the institutions in their states about the possible impact of the model," Lucy Ito, president and chief executive of the National Association of State Credit Union Supervisors, said in a statement. "We are monitoring the potential impact of the CECL model on credit unions with the objective of preparing state supervisors for a 2019 implementation date."
The FASB unveiled its proposal in December 2012, three years after a commission established by the FASB and the International Accounting Standards Board cited "delayed recognition of losses associated with loans" as a key weakness prior to the financial crisis. To promote more timely reporting, CECL mandates that lenders estimate expected credit losses — defined as cash flow an institution does not expect to collect from a borrower — when they originate a loan.
The top banking lobbies acknowledge that the current incurred-loss model for loan losses, which requires the probability of a default before provisioning is allowed, is not ideal. The ABA and ICBA are displeased with CECL's central requirement that lenders forecast credit losses over the lifetime of the loan.
For many bankers, the prospect of CECL, which has been in development for years, has become a kind of sword of Damocles that will make their jobs considerably more difficult and costly if the thread breaks and the proposal is implemented.
Financial institutions already devote a significant amount of time and resources deciding on loan-loss provisions under existing standards. CECL promises to complicate the process even more, said Michael Gullette, the ABA's vice president for accounting and financial management.
"It's going to take a lot more work," Gullette said. "Projecting loan losses for the life of the loan at the time of origination creates a lot of complexity."
Lenders also worry that the need to provision on day one will require them to boost their loan-loss allowances, which could cut into earnings and lower capital levels.
"The CECL model represents the biggest change — ever — to bank accounting," Nichols wrote. "We are doubtful that auditors and the Securities and Exchange Commission, Public Company Accounting Oversight Board and banking regulators, in whole or in part, would accept current processes or levels of documentation."
CECL, to be sure, has its supporters.
Timothy Alexander, an economist and managing director at Triune Global Financial Services in Los Angeles, said it is time for banks to stop complaining and start modeling. Compliance may actually make bring some benefits, he said.
"I believe CECL has an important benefit for banks and regulators, namely intuition," Alexander wrote in a recent op-ed in American Banker.
"I entered banking almost three decades ago and my mentors followed the 10:00 am to 4:00 pm schedule with a two-hour and three-martini lunch," Alexander added. "But they were good bankers and had an outstanding intuition. … I believe the CECL initiative will, to a small degree, help to bring a positive change by providing a simple and methodical forward-looking tool to accompany gut feeling."
FASB spokeswoman Christine Klimek noted that the organization has worked closely with bankers throughout the five years spent developing and drafting CECL. She said her group is willing to keep talking — hence the much ballyhooed public session, set for Feb. 4, where FASB members are expected to hear from a number of bankers worried about the proposal.
"The upcoming standard on impairment already incorporates input provided to us by banks of all sizes throughout the course of the project," Klimek said in a statement. "That said, we are continuing our dialogue with stakeholders — including the ABA — to understand their concerns about implementation of the CECL model."
The FASB had been expected to vote on CECL as early as this month. There's no word on when a vote will take place.
Gullette said he has met with FASB officials on numerous occasions in recent years. He said FASB members focused most of those talks, as well as those involving other officials and bankers tied to the trade group, on specific issues.
In its most recent draft, circulated in September, Gullette said the FASB chose not to incorporate suggested changes the ABA and other bank groups made in hopes of limiting the burden that CECL would impose on banks.
"We really haven't been seeing that in any of their documents,'" Gullette said. "We haven't seen any changes that would have alleviated the complexity for community banks. That raised a red flag."