As banks prepare to implement the Financial Accounting Standards Board’s current expected credit loss standard, Federal Reserve Board Chairman Jerome Powell said that the agency will be “watching carefully” to see how the standard will affect banks and the economy.
“We’re doing everything we can to avoid a big change that’s disruptive to lending,” Powell said during his annual testimony before the House Financial Services Committee today. “We’ve tried to work with banks so that they’ll be able to implement this FASB decision in ways that are not too disruptive and too expensive and too complicated.” He added that the Fed is allowing banks to phase-in the new standard over a three-year period.
The American Bankers Association has previously raised concerns that the Fed’s three-year phase-in does not go far enough to ensure CECL will function as intended, and that there could still be significant adverse effects on regulatory capital as the standard is implemented, particularly in the event of an economic downturn. The association has advocated for a quantitative impact study that would examine the effect of CECL throughout a credit cycle, including the standard’s effect on credit availability and procyclicality, among other things.
Powell stopped short of weighing in on whether conducting a quantitative impact study on the standard would be useful. He did suggest, however, that the Fed does not expect the standard to have a procyclical effect.