Banks and other financial institutions shouldn’t expect any last-minutes revisions to a historic rule change for calculating loan loss allowances set to kick in next year.
Financial Accounting Standards Board member Hal Schroeder said no substantive changes in the accounting rules for current expected credit losses, or CECL, are expected before they take effect in 2020. And he sees no reason to delay the accounting change.
The largest banks are prepared to implement the new accounting on time. And other financial institutions have at least an extra year to adopt the accounting standard, Schroeder said May 7 in remarks at a financial instruments conference co-hosted by Bloomberg Tax and Deloitte LLP.
He spoke as 25 members of Congress delivered a letter to the Securities and Exchange Commission again asking the regulator to study the impact of CECL on banks. The bipartisan letter cited concerns about the how rule would work in a recession.
Schroeder said CECL wasn’t his first choice to better align accounting rules with the credit risk banks take as part of their routine lending. He would have preferred a fair value approach, he said.
But he defended the rule and rebuffed its critics, calling it a compromise that delivers better information to investors and saying that it is within the operational capability for community banks.
“They know their customers,” Schroeder said of community banks. “I’m the least concerned about their ability to implement this standard.”
He acknowledged that the smaller credit unions and community banks didn’t cause the 2008 financial crisis. However they operate in the same environment as larger banks and aren’t immune to risks in lending or economic changes. He noted that some of those smaller institutions also failed during that time and could struggle or fail in future recessions.
The 2008 financial crisis exposed a rift in accounting for credit losses. Expiring rules required banks to book reserves only when it was clear that the loan would fail. That resulted in too little action too late by both the banks and regulators. The pending change would require banks to look to the future and book losses based on “reasonable and supportable” forecasts.
Schroeder said that under the expiring rules, investors could make money by estimating loan losses, giving them a competitive advantage. But with banks declaring their expected future losses, that competitive advantage is lost.
“No competitive advantage is worth keeping accounting that, in good times, masks warning signs of rising credit risk and in bad times is ignored,” he said.