Former Comptroller: CECL a ‘Real Threat’ to Financial System

In an op-ed in American Banker today, industry veteran and former Comptroller of the Currency Gene Ludwig warned that the Financial Accounting Standards Board’s current expected credit loss standard “will both undermine the financial industry’s ability to work itself out of a crisis and discourage lending to small businesses.” Calling the CECL changes—which took effect for the nation’s largest banks this month—“suboptimal at best,” Ludwig shared a concern that ABA has long raised that CECL could severely constrain credit in an economic downturn.

“In good times, the FASB is now encouraging banks to use modeling standards that require financial institutions to put funding aside in amounts that are often far beyond what the banks themselves deem appropriate for their least risky loans,” Ludwig wrote. “CECL also threatens to undermine the financial system during bad times. At the sign of a downturn, banks are now required to contribute more to their [allowance for loan and lease losses].”

He added that implementing the standard will be a particular challenge for community banks. “Community banks simply don’t have the margins to accommodate CECL’s mandated reserve requirements and compliance costs,” he said. “Moreover, the new accounting rules fail to account for the fact that community bankers often make judgments based on personal relationships and deep familiarity with their clients. As a result, community banks will immediately have to set money aside for loans with minimal to nonexistent risk.”