By Monica C. Meinert and Evan SparksDuring a sometimes-heated roundtable conversation today, ABA staff and member bankers raised important concerns about the Financial Standards Accounting Board’s proposed Current Expected Credit Loss model for loan loss accounting. FASB board members said they would address several of ABA’s concerns as the final standard is issued and implementation proceeds over the next few years.
The roundtable was convened after two years of requests from ABA, which has long argued that the weightiness of the accounting changes envisioned warranted more intensive public discussions. During the three-hour meeting, ABA focused on several key points that the CECL standard still needs to address prior to implementation, including the need for further clarification on the expectations and assumptions auditors will operate under when assessing banks’ loan loss models, a more specific life-of-loan concept, and the scalability of the standard to community banks of varying sizes.
ABA stressed the need for a comprehensive cost/benefit analysis, prior to the start of the implementation process, so that “it’s not like Obamacare, where you have to pass it to find out what’s in it,” said ABA VP Mike Gullette. He added that FASB should carefully assess whether the proposed standard would be a marked improvement over current practices.
Gullette pointed out that over the past three years, audit standards have evolved, with bankers being increasingly challenged to precisely support the impact of any assumptions they make with respect to life of loan estimation. Small changes to a life-of-loan assumption could create big changes in yearly net income, he said, something auditors will need to take into account.
Gullette added that banks cannot know the real cost of implementing CECL until clarity is provided on what regulator and auditor expectations are, and that care must be taken to ensure that banks aren’t “spending $1,000 to get a $10 better answer.”
The ABA member bankers present also encouraged FASB to further clarify the life-of-loan concept in future iterations of the CECL standard, claiming that as currently defined, the life-of-loan language implies that bankers must spend significant efforts to identify, track and adjust their life-of-loan estimates over time. “If you start to focus on life of loan, you get into a lot of complexity about what is the life of the loan,” said Doug Wright, CFO of Silvergate Bank in San Diego. “I think it needs to be addressed in the standard.” Many expressed confusion over how to incorporate more granular forecasts into an overall life-of-loan concept model.
Auditors were in agreement about the need for more defined terms to help ensure consistency in assessing the standard. As Walter McNeary of Dixon Hughes Goodman pointed out, the standard calls for forward-looking forecasts to be “reasonable” and “supportable,” terms which, without clarification, could be left open to broad interpretations. A FASB board member said they would add clarity around the meaning of “reasonable,” “supportable,” “unreasonable cost and effort” and other terms in the standard.
After hearing the discussion, Richard E. Forrestel, Jr., a bank director and accountant who has worked closely with FASB before, recommended that FASB issue an updated exposure draft of the standard that bankers could review and comment on before proceeding with the final standard, which has been expected to come out in the second quarter.
ABA’s tone of firm but constructive feedback and participation contrasted sharply at times with the harsher rhetoric of other panelists. However, the tone at the conclusion of the meeting was one of careful optimism that the CECL standard could, with the inclusion of more concrete guidance, definitions and examples, be successfully implemented at institutions of various sizes.
The regulators in attendance also expressed their commitment to making the CECL standard scalable for banks of all sizes. The Federal Reserve’s Joanne Wakim assured bankers that regulators will “expect to see CECL implemented differently at different banks.” And FDIC chief Accountant Bob Storch said “we are not requiring complex models from all institutions.”
Storch echoed Gullette’s call for a well-phased-in transition period, noting that FDIC examiners would need time to understand CECL as well. “We are open to ongoing dialogue with institutions on how we can offer assistance,” he said. It is important to get “the right examples in the CECL materials” so examiners will understand how to apply at community banks, added ABA member James Brannen, CFO and senior loan officer at Federal Savings Bank in Dover, N.H. “My examiners aren’t here, so I’ve got to be able to show them what you all think we’re trying to accomplish here.”
Gullette and ABA’s Accounting Administrative Committee members will continue to engage closely with FASB to secure acceptable changes that promise a practical transition period to new impairment accounting standards.
Monica C. Meinert is assistant editor, and Evan Sparks is editor-in-chief, at the ABA Banking Journal.