Congress Sows Confusion With Move to Ease Bank Accounting

Unusual congressional intervention in a major accounting rule breaks precedent but may not even give banks the relief they say they need.

Tucked into the sweeping coronavirus relief package (H.R. 748) the Senate passed late Wednesday is a provision overriding U.S. accounting rulemakers’ deadline for complying with the biggest change to bank accounting in decades. The House expects to pick up the legislation Friday. The move, meant to give banks breathing room as they deal with cash-strapped customers and potential defaults, raises many questions, financial reporting professionals say..

The legislation gives banks the option to delay the current expected credit losses (CECL) standard until the period after Dec. 31 or until public health authorities declare the national state of emergency over, whichever is earlier.

To start, no one knows how or when to start a new accounting method that’s triggered by a third-party event, said Garver Moore, managing director at Abrigo, a consulting company that helps banks implement the new standard.

“If the president tweets that the pandemic is over, the way this is written then you may have to implement CECL,” Moore said.

At the very least, the Financial Accounting Standards Board, the author of the new rule, needs to clarify when companies need to follow the new accounting rules, he said.

“My phone has been ringing off the hook,” he said.

Will they or won’t they?

Publicly traded banks already had to start following the new rule Jan. 1. It requires them to look to the future, consider past experience, and assess current conditions to calculate losses on loans before they go sour. The accounting upends years of banks only recording losses when they were “probable,” which in practice meant customers had already missed payments. Most banks now expect to increase the losses they record as well as the reserves they set aside to cover them.

Banks spent years preparing to change their bookkeeping systems, paying consultants, and giving investors and analysts a heads-up on how much their loan loss reserves would change and how that would affect earnings and capital. Then the coronavirus pandemic turned all those predictions upside down. As businesses shut down, travel stops, and unemployment soars, banks expect losses to mount. The new accounting could amplify those losses and curb lending when regulators want banks to inject credit into the market the most, they say.

This is the argument dozens of mid-sized banks made to House and Senate leaders in a letter March 19. The groups said Congress should delay CECL until at least 2024so they could make loans and support customers through the coronavirus crisis. The banks ranged from Ally Financial Inc. and Capital One Corp. to smaller institutions like Sandy Spring Bancorp Inc. Notably absent from the letter were money-center banks like JPMorgan Chase & Co. and Citigroup Inc.

The country’s largest banks signaled as early as 2018 that while they may not like CECL, they were prepared to follow it on time and as is.

If some banks take the delay drafted in the lawmaker bill and others don’t, this means confusion for investors, said Jack Ciesielski, author of The Analyst’s Accounting Observer.

“What you’re going to have is a mongrel banking system as far as loan losses go and it’s going to be very hard to get a consistent read across banks,” he said.

That could be a moot point, though. For some mid-sized and regional banks, a potential delay to year-end or until the coronavirus pandemic is over could be too short to be worth it. Banks would need to make the call now—days before their first quarter ends—to decide whether to follow CECL for financial statements due in the spring, said Michael Fadil, chief risk officer at Home Diversification Corp.

“This just misses the mark,” said Fadil, former vice president at Citizens Financial Group Inc. “Other than acknowledging CECL can be problematic, it doesn’t seem like the lawmakers understand what’s problematic about it.”

Regulators Move

Banks may also not want to put off the standard because of regulatory capital breaks bank regulators allowed on Jan. 1, said Ethan Heisler, senior director at Kroll Bond Rating Agency Inc.

Bank regulators in December 2018 published a rule that allows banks to phase in the so-called day-one capital impact of moving from the old accounting rules to CECL. The guidance from the Federal Deposit Insurance Corp., Federal Reserve, and the Office of the Comptroller of the Currency eases the initial hit of shoring up capital on the first day the new rules take effect. That day was Jan. 1 for large publicly traded banks.

If banks delay CECL implementation, it is unclear if they could qualify to get that break on shoring up their capital if they wait until later to adopt it, Heisler said.

“I don’t understand how this is a solution,” Heisler said. “It’s not going to save them in this financial crisis. The feds gave them this lifeline of a phase in, they should take it.”

Bank regulators have said they would closely monitor any questions or problems banks have as they overhaul their accounting and act if they need to.