Small Banks to Get More Time on Loan Loss Accounting Changes (1)

July 17, 2019, 3:04 PMUpdated: July 17, 2019, 8:17 PM

For months, U.S. accounting rulemakers have repeated the same message about major new rules about to hit banks’ bottom lines: expect to follow the rules on time and as is.

That message changed on July 17.

The Financial Accounting Standards Board voted unanimously to give small public banks, credit unions, and privately held institutions until 2023 to comply with the current expected credit losses (CECL) accounting standard.

If the board finalizes the plan, large publicly traded banks like Citigroup Inc., JP Morgan Chase & Co., and Wells Fargo & Co. would have to follow the new rules in 2020, as FASB originally planned.

The potential delay for smaller institutions comes as FASB faces significant pushback on the new rules, with bankers warning the new accounting standard will force them to curtail lending as they shore up capital to hold against future losses. Lawmakers have entered the fray as well. They have introduced bills, albeit with long odds of enactment, in the U.S. House and Senate calling on FASB to halt the accounting standard until a regulator studies how the new standard could affect the economy.

“We aren’t doing this because of the political rhetoric,” FASB Chairman Russell Golden told Bloomberg Tax. “We’re doing it because we think it will help ensure a quality implementation.”

Big Banks Pave Way, Others Follow

Smaller reporting companies, which would qualify for the extension, are companies that have a public float of less than $250 million, as defined by the SEC. A company also would qualify if it has less than $100 million in annual revenues and either no public float or one of less than $700 million.

FASB reasoned that smaller public companies, private companies, credit unions, and community banks needed more time to implement the major new rules, in part because they could learn from the big banks’ implementation experience.

“If you sit me down with a blank piece of paper and tell me to get my footnotes ready, that’s one thing,” said Tim Zimmerman, CEO of Standard Bank PaSB in Monroeville, Pa. “But if I’m looking at the footnotes and I see they’re basically done, it gives me a path and model to walk.”

The extension won’t cure all the criticisms of the new accounting standard, however.

“It doesn’t address the issues that are at the root of it for us; we don’t feel like credit unions should be subject to the standard,” said Curt Long, chief economist at the National Association of Federally-Insured Credit Unions.

“With that said, we are looking for relief from the standard where it can be found,” Long said.

American Bankers Association President Rob Nichols said in a statement after FASB’s vote that the board should delay the “flawed” standard for all institutions and use the time to study its economic impact.


FASB published the credit losses standard in 2016 as the board’s main response to the 2008 financial crisis. It calls on banks and other businesses to look to the future, consider past experience, and assess current economic conditions to calculate losses on souring loans and set aside corresponding loan loss reserves.

It replaces much-criticized legacy accounting rules that allow banks to record losses only after they have happened. In the aftermath of the crisis, regulators, investors, and bankers said the outgoing rules resulted in bank balance sheets looking healthy even as losses deepened.

But as the clock ticks toward 2020, banks have raised alarm bells. Many worry about incorporating forward-looking estimates into the already sensitive loan loss calculation. And when a bank increases its loan loss reserves, it has to set aside more capital to meet separate bank regulator requirements. More money tied up in capital reserves means less money to lend and invest.

Banks also have warned FASB about the massive data collection effort they will have to undertake to properly follow the rules.

“Any additional time that allows time to get ready for this is a plus,” said Zimmerman, who is former chairman of the Independent Community Bankers of America. “What’s not happening is they’re not really changing how you have to comply—or the amount of work.”

FASB’s staff also issued on July 18 guidance via a question-and-answer document on how banks should make reasonable and supportable forecasts of loan losses.

(Updates with reaction from American Bankers Association in paragraph 13, FASB guidance in last paragraph.)

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; Steven Marcy at smarcy@bloombergtax.com

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