Financial Accounting News

Calls Building for Delay of Loan Loss Accounting Overhaul (1)

March 19, 2020, 5:11 PMUpdated: March 19, 2020, 6:05 PM

Federal Deposit Insurance Corp. Chairman Jelena McWilliams sent a rare request to U.S. accounting rulemakers asking them to hold off on making banks comply with major new credit loss accounting rules.

A moratorium on the current expected credit losses (CECL) accounting standard should be considered for banks that haven’t implemented it yet amid “unprecedented” uncertainty about the coronavirus pandemic, McWilliams said Thursday.

That would allow banks to focus on the “immediate business challenges” of Covid-19. For large publicly traded banks that must comply this year, she asked the board to give them the option to follow the rules.

“In view of the sudden and signifcant changes in the economy over just the past several days and the uncertainty of the future economic forecast, banks may face higher-than-anticipated increases in credit loss allowances,” she wrote in a letter to the Financial Accounting Standards Board.

The accounting change has been unpopular with bankers since FASB published it in 2016 but criticism of CECL has intensified in recent weeks with bankers and members of Congress saying the economic upheaval intensifies the effect of the new accounting and could dry up lending.

Dozens of banks earlier on Thursday called on Congress to intervene on CECL.

The banks, ranging from Ally Financial Inc. and Capital One Corp. to smaller institutions like Sandy Spring Bancorp Inc., wrote in letters to the House and Senate that their fears about the consequences of the accounting standard “are coming true.”

The rule, issued by FASB in 2016, went into effect for large publicly traded businesses this year. Privately held banks, credit unions, and smaller public companies are to follow the rules in 2023. The standard requires banks to set aside reserves to cover potential losses over the life of a loan. Most banks expect to record losses much earlier than they do under outgoing accounting rules.

The accounting overhaul affects the amount of capital banks must hold to meet regulatory requirements. Increasing the credit losses they record also affects bank earnings.

(Updated with additional information throughout.)

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Kathy Larsen at klarsen@bloombergtax.com

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