By Josh Stein
Three years after it was issued—and amid numerous congressional hearings, a mandate for the Treasury Department to study its economic impacts, and recent regulator calls for reconsideration—the CECL accounting standard became effective for most large banks on January 1, 2020. Some thought that the CECL fight was over.
Enter the coronavirus pandemic.
Energized by the FDIC’s call to reconsider certain FASB accounting rules and provide banks greater capability to assist borrowers during the anticipated economic downturn, Congress included provisions in the CARES Act that give banks an option to delay CECL until the earlier of December 31, 2020 or the end of the national emergency, as well as to suspend Troubled Debt Restructuring accounting for certain qualified loans. SEC Chief Accountant Sagar Teotia, however, took a harder-line interpretation. While acknowledging that the new law represents U.S. GAAP, certain technicalities get in the way.
First, the delay is a “one-time” option, meaning the decision must be made immediately. Considering the law’s March 27 enactment relative to first quarter financial reporting deadlines, the SEC gave banks almost no time to weigh the pros and cons of delaying.
Additionally, once the relief period ends, a bank that chose to delay CECL will have to retroactively apply it as of January 1, 2020. Oddly, the SEC stated that if the reporting period of incurred loss accounting ends on December 31, CECL then starts the very same day and not the next day, as fiscal years normally do. As a result, banks that delay CECL would need to maintain two sets of books (one for incurred losses and one for CECL) for 2020.
Several members of Congress have noted that Teotia’s interpretation is inconsistent with congressional intent. As a result, technical corrections are being considered to provide a certain one-year delay (starting in 2021), including a proposed bill, H.R. 6551, introduced by Rep Brad Sherman (D-Calif.).
Did this interpretation discourage some banks from delaying CECL? Probably.
However, based on a review of SEC filings, a total of 45 banks opted for the CECL delay. These institutions represent 25 percent of eligible banks, and range in size from $2.7 billion to $18.7 billion in assets. Of course, these banks are counting on the technical corrections to be included in future COVID -19 relief legislation. In the meantime, considering the FDIC call to delay and reconsider CECL was joined by a similar call by National Credit Union Administration Chairman Rodney E. Hood to exempt all credit unions, the CECL wars appear to show no sign of stopping.
Banking agencies grant more capital relief to CECL adopters
As Congress and the SEC work to reconcile their differences, the FDIC, OCC and Federal Reserve provided revised CECL transition relief to counterbalance CECL’s ongoing effect on regulatory capital. Under the interim final rule, banks will now be able to defer all of the increase in loan loss reserves at implementation, plus 25 percent of reserve builds made until December 31, 2021.
After that, the accumulated balance will be phased-in over the following three years. Additionally, accommodations were made so that banks opting for the delay would receive similar relief once CECL is adopted.
While ABA views the ruling effort as helpful, concerns still exist. Specifically, the ruling’s 25 percent multiplier is based on bank estimates assuming the benign economic environment of January 2020 and, as such, ignores the volatility that CECL brings during economic downturns. In other words, bankers can expect CECL reserves to be much greater than 25 percent higher than incurred loss estimates would be during the stressed economic environment that is forecast. The 25 percent across-the-board treatment also does not factor in the inherent volatility of consumer loan portfolios, particularly for lower and moderate-income borrowers. As a result, availability of credit to these important borrowers may be particularly restricted.
With the December 2019 appropriations package mandating that the Treasury Department conduct a study on the need for changes to regulatory capital requirements necessitated by CECL, ABA is recommending that these issues be addressed in the study for long-term consideration of regulatory capital in a CECL environment.
Josh Stein is VP for accounting and financial management at ABA.