Bills recently unveiled in the U.S. Senate and House of Representatives are threatening to yet again push the pause button on a key attempt to make sure the banking system is better prepared for the next recession. The decade-long initiative could impose costs on many banks by forcing to significant increases in their reserves.

Following the 2008 financial crisis, the Financial Standards Accounting Board decided to revisit how banks estimate the allowances they make for loan and lease losses on their balance sheets. Eight years later, the agency issued its new final standard called the Current Expected Credit Loss model, or CECL.

Since then, the new standard has been met with criticism, rule changes and delays, but finally was set to take effect at the beginning of 2020 for publicly-traded banks registered with the SEC.

Despite there being less than six months until the first group of banks are subject to the new accounting method, experts say that not only is there a chance a bill could pass Congress, but that a delay is desperately needed to correctly understand CECL’s impact on the banking system, which has remained uncertain.

“CECL is not something that can be undone,” said Jon Skarin, executive vice president at the Massachusetts Bankers Association. “This is a case where there is an opportunity to take a step back and do a comprehensive assessment of what the likely impact is.”

Skarin said the bills, introduced by Reps. Vicente Gonzalez (D-Texas) and Ted Budd (R-North Carolina) and Sen. Thom Tillis (R-North Carolina), have widespread support across the banking sector.

“Accounting policies should not drive economic outcomes,” The Cooperative Credit Union Association said in a statement to Banker & Tradesman. “A rigorous study conducted by regulators is needed to assess the effect this new standard will have on the ability of credit unions to serve their members and support the broader economy, particularly when the economy is under stress.”

Costs Loom for Some Banks

Banks currently recognize their loan losses through an incurred model.

When an event occurs that impairs a loan and causes it to lose value, a bank reflects this on its financial statements after the fact. Under CECL, banks will essentially have to forecast losses on the life of a loan and anticipate which loans are likely to become impaired based on detailed data and historical losses, potentially forcing banks to keep much larger reserves.

Many community banks and credit unions, particularly in New England, don’t have many losses to go on as they make their forecasts, however. Even in the wake of the financial crisis, their balance sheets were pretty clean.

In fact, as Banker & Tradesman has previously reported, many of Massachusetts’ stock banks expect CECL to have a very minimal impact on their reserves.

It’s also not the same for all banks.

Other lenders in other regions could be impacted differently, noted Skarin, and larger banks would seemingly be hit harder. JPMorgan Chase reported in February that it expects to see a $5 billion increase in its total reserves under CECL, representing a 35 percent jump from total reserves in 2018.

Both bills in the House and Senate would essentially delay CECL for up to a year after being enacted until the major regulatory agencies – the Federal Reserve, the OCC, FDIC and SEC – can thoroughly assess CECL’s impact.

Because Congress has no authority over FASB, which is a private, standard-setting nonprofit, the bill would direct major regulatory agencies to essentially ignore CECL and not run any compliance checks until the assessment has been published, or until a year after the bill.

Russ Golden, chairman of the Financial Accounting Standards Board, has defended CECL, telling American Banker that “the benefits justify the cost,” and adding he believes it is not surprising to see opposition when a big change to the rules is fast approaching.

Bram Berkowitz

Not So Fast

While there does seem to be support for a CECL delay, Skarin warned that getting anything passed in Washington these days is not easy.

And time is short, with only a few months until publicly-traded banks must start abiding by the new accounting principles. Credit unions and other mutual banks don’t have to implement the principles until 2021.

And Skarin said there will probably need to be at least one congressional hearing before any vote could be held.

Due to the uncertainty, Skarin said the MBA and most other industry trade groups are encouraging financial institutions to continue preparing for CECL as if it will be implemented as originally anticipated.

Still, any sign of delay could hurt preparation efforts.

In April, only 14 percent of SEC registrants said they were currently running parallel loan loss allowance models under CECL, while 3 percent of SEC registrants acknowledged they had not yet begun preparations at all, according a survey from technology compliance provider Abrigo.

Around the same time, David O’Connell, a senior analyst at the Boston-based research firm Aite Group, also conducted a CECL survey, which found that 32 percent of the 20 community bank respondents only expected to be ready right before implementation.

“One thing I couldn’t capture in the survey is that there is this really odd undercurrent, where people think this won’t be required of them,” O’Connell told Banker & Tradesman at the time. “I and others involved can’t see where this wishful thinking is coming from, but this is driving the delay.”

Skarin stressed that the intent of the pending bills is not solely to delay CECL but make tweaks if necessary and understand the full range of implications of the new accounting method before the industry is too far along in the process.