Is it too late for Congress to stop CECL?

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WASHINGTON — Lawmakers appear consistently opposed to an overhaul of loan-loss accounting standards, saying the coming changes will hurt small lenders. But the prospects of their criticism turning into a legislative blockade of the new rules are doubtful, observers said.

Both Democrats and Republicans on the House Financial Services Committee focused their attention last week, at a regulatory policy hearing, on the Current Expected Credit Loss standard. They charged that the Financial Accounting Standards Board model will pose undue compliance burdens for community banks and credit unions.

Members of Congress appear to be exploring legislative avenues to stop CECL from taking effect. But analysts say, despite lawmakers' outrage, there may not be enough time or political will for Congress to halt or delay its implementation. There could also be a downside for members to oppose tougher loan-loss accounting.

“There’s little political upside to owning a change in accounting rules that could reduce bank loan-loss requirements,” said Jaret Seiberg, an analyst with Cowen Washington Research Group. “But there’s a lot of political risk. No one’s going to vote for you if you undo a FASB rule, but if the economy goes bad and banks get into trouble, that vote can be a political liability.”

The new model will take effect Jan. 1 for publicly traded banks. Privately held banks and credit unions have until Jan. 1, 2022.

“I think there’s a considerable amount of hand wringing over the new CECL accounting standard but it’s unclear whether Congress has the capacity or the political will to act,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. “I think it’s difficult to see any financial services legislation moving, full stop.”

The CECL model, adopted by FASB in 2016, is a more conservative approach to loss accounting than the current standard, requiring financial institutions to estimate losses over the entire life of a loan. Institutions must record projected credit losses when a loan is originated.

Criticism of the new standard reached a fever pitch in December when the Financial Stability Oversight Council discussed it during a lengthy closed-door meeting. A day after that meeting, nine GOP members of the House Financial Services Committee sent a letter to FASB Chairman Russell Golden and Jay Clayton, chairman of the Securities and Exchange Commission, suggesting that studies the board had used to formulate the new model were flawed.

The same day, Rep. Blaine Luetkemeyer, R-Mo., one of the letter’s signatories, introduced a bill to make CECL implementation contingent on the completion of a qualitative impact study. His bill echoes an earlier call by the American Bankers Association for a similar study. Luetkemeyer’s staff are continuing to circulate draft legislation, hoping to build bipartisan support, a source familiar with the discussions said.

Members of the House committee continued the drumbeat criticizing the rule in a hearing Thursday with principals of the Federal Deposit Insurance Corp., Federal Reserve Board, Office of the Comptroller of the Currency and National Credit Union Administration.

"We need to put a stop, a stop right now on FASB's ruling in terms of CECL. This ruling is absolutely devastating to our smaller banks, without question, and our credit unions," said Rep. David Scott, D-Ga., at the hearing. He added, "We may need to pass legislation or something to put a stop to this."

But even with pressure from Congress to stop CECL’s implementation, publicly traded banks are likely more focused on preparing to comply with the standard than stopping it from taking effect.

“Our expectation remains that publicly traded banks at end of the year will adopt the Current Expected Credit Loss approach to loan loss reserving,” Seiberg said in a note Monday. “We do not see Congress blocking the rule and we question if banks really want to establish a precedent where Capitol Hill determines accounting treatment."

Smaller institutions have voiced opposition to the new proposed model since before FASB issued the final standard in 2016. But their challenge in seeking to delay or block CECL is that when the accounting board first rolled it out, the bank regulators' attention was diverted as they were writing rules to implement the Dodd-Frank Act. A draft CECL proposal was released in 2012.

“Part of the problem here is that this change was being formulated at a time when a lot of other rules and regulations were being rolled out,” Seiberg said. “So it didn’t get attention until really late in the process. So the end result is that the industry’s focus may be coming too late.”

Similarly, Boltansky said, the industry spent much of its energy last year pushing for the regulatory relief law that was signed into law in May 2018, so CECL didn’t garner much attention.

“From a tactical perspective, the industry was so focused on the regulatory relief bill that there wasn’t sufficient focus or educating being done on the CECL front,” Boltansky said. “It was so important for the industry to get the regulatory relief bill done that perhaps CECL was viewed as a second-tier issue. Now with the deadline right around the corner, it’s been updated to a first-tier issue.”

Still, the banking industry is hopeful that FASB is listening to lawmakers' concerns and will make adjustments to make it easier for smaller banks to comply.

“There’s pressure in that people realize an actual bill could pass and there is also pressure in legislative hearings because they are asking critical questions that need to be answered,” said James Ballentine, executive vice president for political affairs and congressional relations at the American Bankers Association. “There have been letters written on the issue. And I think there will be letters written in the future on this issue.”

A spokesperson for FASB did not rule out the board making tweaks to the standard before the implementation deadline. “The FASB continues to refine and improve the CECL standard as we engage with stakeholders who share their perspectives,” the spokesperson said in an email.

Ballentine added that concerns raised by regulators, including comments by FDIC Chairman Jelena McWilliams at last week's hearing, about how banks will be able to comply with the new standard could further convince FASB to consider changes to to CECL.

“I think the input of the regulatory agencies, which do have responsibility for financial stability, can be nothing but helpful in helping FASB to determine what steps they need to move forward on this effort,” Ballentine said.

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