In a letter to Treasury Secretary Steven Mnuchin yesterday, the American Bankers Association and 52 state bankers associations called for a quantitative impact study to assess the full effects of the Financial Accounting Standards Board’s Current Expected Credit Loss standard on bank capital. The associations urged the Financial Stability Oversight Council to delay the implementation until such a study can be carried out.
The associations noted that preliminary testing has shown that the standard will increase procyclicality, which generally causes loan loss allowances to spike during times of stress, which could have significant implications for banks with concentrations of residential mortgages, small business loans and loans to non-prime consumers. “Said plainly, during a recession, the capital impact related to these products will dissuade most banks from lending,” they wrote. “We do not believe the banking agencies would have supported the issuance of CECL if this were foreseen.”
Accordingly, the associations called for a “transparent, two-pronged quantitative impact study” that would evaluate the standard’s effect on the overall stability and on the availability and affordability of credit throughout an economic cycle, as well as the effects of CECL on smaller institutions.