Industry group urges delay in new accounting standard for loan losses

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WASHINGTON — A group of the nation’s largest banks are urging regulators to delay a new accounting standard that requires banks to immediately book potential loan losses, arguing it could inadvertently create systemic risk.

The Bank Policy Institute said in a letter this week to Treasury Secretary Steven Mnuchin that the Current Expected Credit Loss accounting rule is a “sea change” from 40 years of traditional accounting standards, and could tie up capital and credit availability. Mnuchin chairs the Financial Stability Oversight Council, which is tasked with identifying risks to the system.

“We believe that the implementation of CECL could undermine financial stability in a future recession as its requirements establish disincentives for banks to extend credit during stressed economic conditions,” Greg Baer, the institute's president and CEO, wrote in the letter.

CECL requires banks to set aside reserves for a potential credit loss as soon as the loan is booked, rather than wait until there is a probable loss with an estimated amount.

These "requirements are likely to adversely affect the availability, structure and price of credit at all times, with a disproportionate impact on longer-term and higher-risk loans, including residential mortgage, small business, student, and unsecured term and non-prime lending,” wrote Baer.

The group is asking the FSOC to work with the Financial Accounting Standards Board to delay the rule, which takes effect Dec. 15, 2019, and try to assess the potential economic and systemic risks.

Analysts say the industry's pushback could have an effect on the implementation.

“Our sense is that there is a growing likelihood of a delay in CECL’s effective date,” Isaac Boltansky, Compass Point’s director of policy research, wrote in an analyst note Thursday.

The new standard was intended to stop banks from recognizing losses too late on their books in a financial crisis. But banks argue CECL went too far by forcing them to predict losses for the entire life of the loan upfront, before there are any signs of trouble.

“CECL creates a significant disincentive to lend during an economic downturn, as each incremental loan originated will require an upfront charge to earnings and therefore be immediately dilutive to capital, without any accounting recognition of the interest income that compensates for this heightened risk,” Baer wrote.

The Bank Policy Institute recently released a study that the CECL standard would have resulted in a 9-percentage-point reduction in lending had it been applied in 2009, based on the credit and capital losses already incurred during the financial crisis.

Analysts and banks are also raising concerns in earnings conference calls. Kelly King, chairman and CEO of BB&T in Winston-Salem, N.C., raised alarms during an earnings call Thursday, urging for a delay in implementing the new standard.

CECL “is a really big deal," Kelly said when asked about the standard. "I mean, the banks will be able to survive it, but the problem is if it goes into effect as now projected, it's really bad for the economy. It's really bad for consumers. It's really bad for business.”

“Anybody out there listening that has a chance to talk to congressional people ... or the regulators, please put in your word, because now it's our time to get this change and put into a more proper light," King added.

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Accounting standards Loan-loss provisions CECL Community banking Regional banks Steven Mnuchin FSOC FASB