Many financial institutions are dreading the day their bank, lender or credit union will be forced to comply with the new current expected credit loss (CECL) standard, created by the Financial Accounting Standards Board (FASB).
Numerous trade associations and members of Congress have called for a delay in its implementation via letters and, most recently, a bill stating in its name purported the need to “Stop and Study” the impact of CECL.
Taking the lead in speaking to the topic during the “Regulatory Roundup” session at the Independent Community Bankers of America’s (ICBA) 2019 conference, Troy Thornton, the Office of the Comptroller of the Currency’s (OCC) deputy comptroller for the Southern District, explained that despite the concerns he’s heard from banks about CECL’s potential impact, and even just the implementation process, bankers should realize that the new standard could come with some benefits.
Specifically, he said that by making the switch to CECL from their current allowance for loan and lease losses (ALLL) standard, banks could avoid certain issues that have arisen in the past, particularly those that many faced before the last financial downturn.
“In some respects, CECL offers some benefits over the existing ALLL standard in the sense that, when we were talking to bankers before the last recession, they knew that they needed to increase provisions because of losses they expected down the road,” Thornton said. “They weren’t able to do that and we often heard complaints from bankers about having their hands tied and not being able to provide for losses that were forthcoming. CECL at least addresses that particular issue. It allows bankers to take into account their understanding of the losses they’re going to see going forward and, therefore, to prepare ahead of time.”
Although the banking sector has seen strong growth, capital and earnings, and a year with few problem loans and banks, Thornton cautioned that he is most nervous when things are going well in the financial sector, not the other way around.
“That’s because we know that some of the worst decisions are made during the best of times,” he said. “We have seen eased underwriting for several years in a row now and, over time, that builds up to actually mean something.”
Specifically, Thornton said he is worried about commercial credit risk, post-funding analyses, the impact of interest-rate risk on funding and cybersecurity risk, among others. He added that during meetings, he often follows discussions about good news contained in industry report cards with a discussion about “preparing for winter,” whether winter is coming is or not.
Regardless of if or when a recession occurs, CECL allows firms to incorporate qualitative information.
Given that community bankers have later CECL compliance dates than larger institutions, many are anticipating a significant impact to their loan-loss reserves.
“The OCC has had eight webinars for national banks and thrifts and various outreach sessions,” Thornton said. “What I’ve been telling our community banks is a purchased model is not necessary. We’ve been encouraging them to send in their CECL analyses so we can work with them as we move toward the due date.”
Publicly-held entities that file 10-Q forms with the Securities and Exchange Commission (SEC) will have to be CECL-compliant by Jan. 1, 2020. SEC filers are required to disclose how the CECL standard will affect them in their 2019 10-Qs.
Publicly-held companies that don’t file 10-Qs with the SEC will have to be CECL-compliant by Jan. 1, 2021, and all other entities (family-owned, privately-held, etc.) will not be required to comply with CECL until Jan. 1, 2022.
Thornton noted that all guidance, FAQs, webinars and other materials the banking agencies have provided about CECL implementation are available on various websites. CECL information is available on the occ.gov website within the “Bank Operations/Accounting” section, and on BankNet, the OCC’s secure website for communicating with and receiving information from national banks and federal savings associations.
Thornton was joined during the session by Federal Deposit Insurance Corp. (FDIC) Director of Risk Management Supervision Doreen Eberley, Fed Associate Director of Supervision and Regulation Kevin Bertsch and ICBA Executive Vice President and Senior Regulatory Counsel Chris Cole, who moderated the session, which included discussion of various other topics related to community banking.