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Loan Loss-Accounting Study Punts On Impact of Pandemic Lending (2)

Sept. 16, 2020, 8:22 PMUpdated: Sept. 16, 2020, 10:17 PM

A Congress-ordered study on the biggest change to bank accounting in decades dodged the biggest question it faced, blaming the pandemic for making an answer impossible.

The study, conducted by Treasury and released Wednesday, concluded that an assessment on whether the current expected credit loss (CECL) standard would make it more difficult to lend during an economic downturn “is not currently feasible” because of the coronavirus pandemic.

“Drawing conclusions right now regarding CECL’s impact since its initial implementation in early 2020 is challenging because CECL has not been fully implemented by all entities, and numerous market factors relating to the COVID-19 global pandemic (including government responses) have affected the economy, financial institutions, and borrowing and lending dynamics,” the study said.

The Financial Accounting Standards Board, the authors of the accounting rule, said it was studying the report.

The study comes at a time when federal regulators like the Federal Reserve have pulled out all the stops to encourage lending and keep banks—and the entire financial system—from collapsing at the same time they’re required to implement the standard.

The standard, which most publicly traded banks started following in January, fundamentally changes how public companies estimate and record loans and other financial instruments on their books. CECL requires companies to book losses and reserve cash to cover those losses when they make those loans, instead of waiting until it’s likely they will lose money. It is considered accounting rulemakers’ central response to the 2008 financial crisis.

Congress Responds

Congressional aides confirmed to Bloomberg Tax Wednesday that they received the study.

Rep. Brad Sherman (D-Calif.), a long-standing critic of the standard, called CECL “bad accounting” and that it is a “departure from the accounting of historical events and an adventure in predicting the future.”

“In this new Treasury Department report, we are told that responding to the key question Treasury is statutorily required to answer ‘is not currently feasible.’ This is yet another indication that implementation of the CECL standard should be halted,” Sherman said in a statement to Bloomberg Tax.

Banks, credit unions, and some lawmakers have railed against the new rule, saying it would force banks to dry up lending in an economic downturn, when customers need money the most.

Lawmakers introduced several bills in 2019 to delay the new standard or kill it altogether. The insertion of a requirement for Treasury to study the accounting rule in Congress’s year-end spending bill was considered a key win for opponents of the new standard.

The provision, nestled in a committee report accompanying the year-end spending legislation (Public Law 116-93), required the department “to conduct a study on the need, if any, for changes to regulatory capital requirements necessitated by CECL, and to submit the study to the Committee within 270 days.”

Michael Gullette, senior vice president at the American Bankers Association said he agreed with the assessment that it was too early to determine the full impact of the accounting standard, but it was clear that estimates required under the CECL are complex and costly.

The standard should be “studied throughout the entire economic cycle to ensure credit will remain available during periods of stress, particularly for low and moderate-income borrowers,” Gullette wrote in an email.

The Study

While the Treasury study didn’t definitively weigh in on whether the accounting hurt banks, it did say Treasury “recognizes the seriousness of the concerns that have been raised concerning CECL’s potential effects on and implications for regulatory capital, lenders, borrowers, and the economy.”

It also said Treasury “supports the goals of CECL—including providing users of financial statements with more forward-looking information and carrying assets on financial statements in a manner that reflects amounts expected to be collected.”

Notably, the report told FASB to explore aligning the timing of the accounting recognition of fees associated with financial assets under GAAP with the earlier accounting recognition of potential credit losses under CECL—a long-held banker criticism of the accounting rule.

“While CECL results in earlier accounting recognition of potential credit losses, GAAP does not provide for early accounting recognition of revenues associated with financial assets. Conceptually, the deferral and amortization of the recognition of fees, in particular, is not entirely consistent with the upfront recognition of lifetime expected credit losses under CECL,” the report said.

FASB has launched a post-mortem of the accounting standard and plans to hold a public meeting early in 2021 to hear banker, accountant, and investor questions and comments about the new accounting rule. It also is analyzing quarterly reports and listening to earnings calls to understand how the accounting is affecting lenders, FASB officials said Tuesday at an American Institute of CPAs banking conference.

Small Banks

While larger institutions have already implemented CECL, privately held banks, credit unions, and smaller publicly traded banks have until 2023 to adopt the new accounting standard.

FASB has said it will assess how large banks follow the standard and determine if it needs to make any changes before smaller institutions have to.

The study affirmed that CECL will affect financial institutions in different ways, depending on a given institution’s business model, as well as its credit modeling, risk management, and related accounting practices, among other factors.

As a result, financial institution’s implementation of CECL will also likely impact its regulatory capital ratios, the study said.

Ultimately, the department recommended that FASB “expand its efforts to consult and coordinate with the prudential regulators when considering any potential future amendments to CECL.”

(Updates with reaction from American Bankers Association starting in the 13th paragraph. )

To contact the reporters on this story: David Hood at; Nicola M. White in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Colleen Murphy at