With less than 10 months before publicly traded companies must start applying the Financial Accounting Standards Board’s (FASB) new credit losses standard, several business groups led by the U.S. Chamber of Commerce asked the Securities and Exchange Commission (SEC) and the accounting board to delay the effective date of 2020.
The banking industry in the past several months has been lobbying regulators to delay the so-called Current Expected Credit Losses (CECL) standard, but the FASB has so far not budged on the scheduled effective date. Now, business groups that represent all industries have banded together in the hopes that the FASB will change its mind.
The commission, which oversees the board, has largely deferred the matter to the FASB.
Besides the Chamber, the American Bankers Association, Bank Policy Institute, Real Estate Roundtable, Commercial Real Estate Finance Council, Mortgage Bankers Association, National Association of Realtors, Credit Union National Association and National Association of Federally Insured Credit Unions also signed the letter.
Financial companies have been unhappy with the FASB’s Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, published in June 2016, because CECL would require them to recognize credit losses early, and they have pressed the FASB to drop or at least delay the rule’s implementation in the past several years. They argued that the standard is too complex and costly to apply. Currently, lenders and others use the “incurred loss” accounting model and write down the losses after borrowers have essentially defaulted on their payments.
“According to a survey by [an international accounting firm], while progress has been made, companies are still struggling to make certain accounting, modeling and data decisions,” the Chamber wrote in a March 5, 2019, letter to SEC Chief Accountant Wesley Bricker and FASB Chairman Russell Golden. “We believe it is important to delay implementation of CECL in order to allow for time to conduct a quantitative impact analysis and to consider potential alternatives, while allowing for post-issuance field testing.”
The business groups said the accounting standard-setter may not have the necessary resources to do an economic analysis, but they said the SEC’s Division of Economic and Risk Analysis is well suited to do the impact analysis. The SEC did not immediately respond to a request for comment. The FASB declined to comment.
CECL requires businesses to look to the future, make reasonable and supportable estimates, and calculate potential losses on loans and certain securities as soon as they issue them and set aside corresponding loss reserves. Companies will also have to apply the standard to purchased financial assets and assets that are already on the books. The standard is considered the accounting board’s most important response to the 2008 financial crisis. Regulators and investors complained that the delayed recognition of losses in current U.S. generally accepted accounting principles (GAAP) made bank balance sheets appear healthy even when the mortgage market was collapsing in 2006 and 2007.
The U.S. Chamber and others also used the same arguments that banks last year used when they told regulators and members of Congress that the standard is likely to have a procyclical effect. This means that banks will have to increase loan loss allowances during economic downturns. This could also mean more volatile levels of regulatory capital and an increased level of capital at all times. When banks have to raise capital levels, it means they have less money available to lend to customers and less money to invest when they need it the most.
“While we think CECL is a well-intended effort to provide investors with better information, certain of our members—both preparers and users of such information—have expressed concerns that the standard will have a negative impact on long-term lending… and will exacerbate many of the hurdles to extending credit that institutions are already facing in the wake of increased capital requirements,” the Chamber wrote. “Time for further assessment will also allow regulators to better understand and address the key consequences of any proposal for capital and other regulatory purposes.”
The Federal Reserve does not believe the standard will have a procyclical effect, but the groups cited a recent analysis that it is likely to have a negative effect on the lending market. They cited an analysis by the Bank Policy Institute that found that had CECL been in effect during the financial crisis, bank ratios would have been more than one and a half percentage point lower, and that total bank lending would have been reduced by an additional nine percentage points.
Meanwhile, the banking supervisors in December 2018 issued a rule that provides a three-year phase-in option for banks to incorporate the impact on regulatory capital from CECL to help with transition.
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