Investors want new accounting standards, FASB says. Investors disagree.
A key proponent for changing accounting rules for loan losses has a new argument: Investors have lost confidence in the existing method.
Speaking to more than 1,000 accounting professionals, Hal Schroeder, who has served on the Financial Accounting Standards Board’s governing board since 2011, forcefully called the current expected credit loss model, or CECL, a "vast improvement over the status quo."
Schroeder said at the American Institute of Certified Public Accountants' National Conference on Banks and Savings Institutions that the incurred-loss method, which assumes all loans will be repaid until a loss or trigger event arises, is no longer relevant.
“Even absent CECL, investors are, and will be, making their own estimates of expected losses,” Schroeder said. “Investors began ignoring GAAP allowances — effectively making their own, much higher loss estimates — 18 months before the beginning of the last recession.”
Schroeder was even more pointed during a question-and-answer session after his remarks.
The current standard is “clearly not decision-useful,” Schroeder said. “It’s being ignored. Most investors, while they may not say it clearly to you … are operating under something much closer to an expected-loss model … which is where we are with CECL today."
CECL, unlike the current standard, removes any threshold for losses, calling on lenders to project a loan’s lifetime losses on the day its booked. It’s a sea change, and lenders and lawmakers have grown increasingly restive as conversion to the new standard — scheduled to start on Jan. 1 — nears.
Several investors questioned Schroeder's claims.
“I think the issue is considerably more complex than [his comments] would indicate,” said Joseph Gladue, research director at Alden Securities. “I believe there's a wide range of beliefs that investors are operating under when it comes to assessing credit for banks.”
“It’s his opinion,” Joseph Stieven, the CEO of Stieven Capital Advisors, said of Schroeder’s comments. “Most investors very much dislike CECL. … We absolutely are looking at the totality of that, and current GAAP" — generally accepted accounting principles — "is part of that.”
Stieven, who said he has disagreed with Schroeder over the issue for years, remains convinced that CECL will restrict access to credit during downturns. “This standard will absolutely push more people on the margins out of the banking system and into subprime, payday loans and pawn shops."
Mike Gullette, senior vice president of tax and accounting at the American Bankers Association, asserted that CECL would render lenders' financial results “more opaque, not less," stating that three-fourths of investors oppose the proposed standard. He also repeated the association’s call for a quantitative impact study before CECL's adoption.
“An independent study will allow a realistic look at how CECL can impact borrowers, banks, and investors to mitigate unintended consequences,” Gullette said.
Other efforts to alter CECL have been unsuccessful.
In November, a group of prominent regional banks, including BB&T, Capital One Financial, Fifth Third Bancorp and U.S. Bancorp, came forward with a proposal that would have created a two-tier allowance, with charge-offs expected within 12 months flowing through earnings and longer-term costs included in other comprehensive income.
FASB considered the plan at a roundtable meeting in January before rejecting it.
While he has no objection to conducting a study, Schroeder made it clear he is "opposed to is stopping" CECL implementation.
“I believe well-designed, well-executed independent studies … are an invaluable tool to standard setting,” Schroeder added. “And I believe there should be more in the future, using real data as it becomes available.”
Despite the supposedly “dire” consequences predicted by CECL's critics, Schroeder noted that only a handful of lenders have used FASB’s Technical Inquiry Service to pose questions.
Sagar Teotia, chief accountant at the Securities and Exchange Commission, reported a similar response to his agency’s offer to consult with lenders on CECL.
“The consultation flow has been relatively modest," Teotia said.
Still, Teotia and other regulators said they are eager to discuss CECL with financial institutions.
“Reach out,” Office of the Comptroller of the Currency Deputy Comptroller and Chief Accountant Sydney Menefee said . “There’s nothing our examiners love more than to talk about allowances.”