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As federal and state regulators encourage banks and credit unions to work with customers facing financial hardships due to the coronavirus crisis, the head of the FDIC wants to delay the implementation of a new accounting standard for banks.
FDIC Chairman Jelena McWilliams sent a letter on March 19 to the Financial Accounting Standards Board (FASB) urging delays in transitioning to the new Current Expected Credit Loss (CECL) standard. She asked the FASB to allow financial institutions currently subject to CECL to postpone implementation.
McWilliams said in her letter that changes in the economy in recent days and uncertainty surrounding the future economic forecast could lead banks to face higher increases in credit loss allowances than they had anticipated. She added that growing economic uncertainties and rapidly evolving measures to confront risks “make certain allowance assessment factors potentially more speculative and less reliable at this time.”
The new standard applied beginning this year to public banks that are SEC filers, excluding small reporting companies.
Other banks and credit unions have until Dec. 15, 2022, to implement CECL. McWilliam’s letter also requested a moratorium on implementing CECL for these institutions so they can “focus on immediate business challenges relating to the impacts of the current pandemic and its effect on the financial system.”
Banks used to recognize their loan losses through an incurred model. When an event occurred that impaired a loan and caused it to lose value, the bank reflected this on their financial statements. Under the new CECL standard, banks essentially have to forecast losses on the life of a loan and anticipate which loans would likely become impaired based on detailed data, impacting the reserves they must keep.
“Today we are confronting new and uncertain challenges in view of the worldwide pandemic,” McWilliams told the FASB. “The nation’s banking industry is responding to rapidly evolving business conditions that are unprecedented in our history. To support the industry’s efforts to focus on their employees and customers, I encourage FASB to take these much needed actions to allow banks to help their communities at this time of need.”
McWilliams also asked the FASB to exclude loan modifications related to COVID-19 from being considered a concession when determining whether a loan should receive the troubled debt restructuring (TDR) classification.
In a memo to banks and credit unions on March 16, the Massachusetts Division of Banks said bank examiners would be flexible when evaluating loans that, from a current accounting standpoint, would be considered TDRs due to borrowers experiencing temporary liquidity shortages related to COVID-19.
