Regionals' proposed CECL fix gets thumbs-down

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A plan to cushion the blow of a controversial accounting rule has its own set of detractors.

A group of regional banks had a chance Monday to present the Financial Accounting Standards Board with a plan they claim will address concerns over the proposed standard for Current Expected Credit Losses. The proposal involves splitting loan-loss estimates into two parts: a 12-month amount reflected on balance sheets and a longer-term figure routed through accumulated other comprehensive income.

That proposal encountered opposition from the nation's four largest banks, based on a belief that implementing such a change would likely require a delay in CECL's rollout. Representatives of those banks said they would rather see FASB proceed with the new standard — as it is.

“We don’t think it’s necessarily fair to the process at this very late stage to re-debate and re-litigate a lot of the issues I think have been given significant consideration by the board over a very lengthy period of time," Dan Palomaki, a managing director and chief financial officer for Citigroup Global Markets, said during a roundtable meeting at FASB’s Norwalk, Conn., headquarters.

“At this point, to add in what we view as [a significant] addition to the model would put significant pressure on our ability to implement on the original time frame,” said Brett Dooley, director of Securities and Exchange Commission reporting and accounting policies at JPMorgan Chase.

Even members of the regional bank group suggested a delay in CECL implementation would be needed if their proposed change was made.

“There should be serious considerations of the time it would take to issue a revised standard and then implement these processes,” said Brad Kimbrough, the principal accounting officer at the $126 billion-asset Regions Financial in Birmingham, Ala.

Publicly traded banks are expected to convert to CECL on Jan. 1, 2020. Privately held companies and credit unions will follow in 2021 and 2022, respectively.

Shane Kuhanack, the FASB's assistant director, said the board would wait until March to decide on the regional banks' plan. While opposition from large banks, combined with a potential delay, might seem to be insurmountable hurdles, at least one board member refused to rule the plan out.

“Splitting some of these provisions could be useful,” FASB board member Hal Schroder said. “I think investors would benefit.”

Still, said Jaret Seiberg, managing director at Cowen Washington Research Group in Washington, it's doubtful FASB will approve the proposal.

“We do not expect FASB to make material changes or delay the standard," Seiberg wrote in a Monday research note. "What might still be on the table, however, are additional regulatory actions to address bank worries about stress testing and CECL."

The FASB approved CECL in June 2016 after nearly eight years of development and debate. Unlike the current standard, which recognizes loan losses only when they are probable, CECL requires financial institutions to forecast a loan’s lifetime credit losses when it is originated. Timothy Golden, executive vice president and controller at $372.5 billion-asset Capital One Financial Corp. in McLean, Va., called it the “most consequential accounting change to ever impact banks and financial institutions” at Monday's session.

Forecasting so far into the future injects an unacceptable level of uncertainty and volatility into financial results, regional bankers argued.

“The further out a forecast goes, the less reliable it becomes,” Golden said.

On the other hand, pushing expected losses beyond 12 months would “remove the distortion and volatility of booking lifetime losses prior to recording any revenues,” said Michael Spychala, controller at the $120 billion-asset M&T Bank in Buffalo, N.Y. “In other words, we believe the proposal would more appropriately reflect the economics of lending.”

Community bankers at Monday’s meeting said their institutions would likely be attracted to any proposal with the potential of limiting CECL’s impact on regulatory capital. At the same time, the added complexity of creating a two-tier loan-loss standard could create major new difficulties.

“We certainly don’t want to add” more complexity, said Timothy Zimmerman, CEO at the $972 million-asset Standard AVB Financial in Monroeville, Pa. “Don’t add more work for us because we already have plenty to do.

Small banks and credit unions are already "struggling with basic operational issues,” tied to CECL, added Doug Wright, chief financial officer at the $3.5 billion-asset Mission Federal Credit Union. “Adding another requirement would create more issues.”

It is unusual for FASB to conduct a roundtable on a standard it approved more than two years ago, industry experts said.

But opposition to CECL has increased in recent months. Critics, including several of the regional banks that presented on Monday, have raised concerns that the standard will be procyclical, magnifying the effects of economic booms and busts. Other groups have called for a delay to conduct a qualitative study to gauge CECL’s impact on the broader economy.

The American Bankers Association has called repeatedly for delaying CECL implementation. It did so again following Monday's roundtable.

"It is clear that in its current form CECL will alter the economics of lending, and these unintended consequences will result in changes to product mix, credit availability and cost of credit, particularly to consumers and small businesses," Rob Nichols, the trade group's president and CEO said in a press release.

While FASB officials did not address those criticisms, they did push back against claims by lawmakers and some investors that the board may have misrepresented investors’ enthusiasm for broad-based changes to loan-loss accounting after the financial crisis.

The standards board analyzed more than 3.300 comment letters and conducted several roundtable meetings and workshops, Kuhaneck said.

“Clearly, I think everyone would agree we’ve met with a number of different stakeholders as part of this process,” Kuhaneck said.

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CECL Accounting regulations Capital requirements Community banking Regional banks FASB