A bipartisan group of 28 House members last week called on the Financial Stability Oversight Council to require that the Office of Financial Research study potential financial stability effects of the current expected credit loss model for loan loss accounting, which goes into effect for large reporting companies as soon as January.
Specifically, the lawmakers called on OFR to study CECL’s procyclical characteristics and their effects on access to credit and market volatility; the effects of CECL on the solvency and leverage of financial institutions; and the effects of procyclicality on institutions complying with CECL, including contagion risk during times of economic stress. The letter cited research from the American Bankers Association and other organizations indicating that “CECL will result in a drastic increase in loss reserves, causing a substantial increase in regulatory capital that will limit lending.”
Rep. Blaine Luetkemeyer (R-Mo.), the lead signer of the letter, raised the issue today during a House Financial Services Committee hearing. Treasury Secretary Steven Mnuchin, who chairs FSOC—a group of U.S. regulators established by the Dodd-Frank Act to monitor financial stability risks—replied that “I will discuss your request at the next FSOC meeting.”
