CECL accounting standard still under fire as banks report day-one impact
FASB chair grilled by US lawmakers over implementation cost of new accounting rules.
[Updated on January 28 with comments from CreditSights analysts.]
Strong performances by JPMorgan and Morgan Stanley, and disappointments at Goldman Sachs, dominated commentary around the 2019 US bank earnings calls in January.
However, lurking in the background was the less eye-catching but critically important CECL, the current expected credit losses accounting standard that banks are adopting this year and which has been an important driver of increases in their allowances for loan losses for 2020.
The new standard dates back to a Financial Accounting Standards Board (FASB) ruling in 2016 and requires banks to account for expected credit losses for the lifetime of a loan upfront.
Controversially, there is an asymmetry in the approach, because banks are not permitted to also recognise the future higher interest payments they would earn as a result of the kind of worsening credit environment that would drive those losses.
"We do not get the sense that banks are meaningfully altering operating strategies due to CECL - in the near-term at least," wrote analysts at CreditSights in a report on January 27. "But we have detected a slight shift in tone as companies start to acknowledge CECL may eventually lead to some product line pullback."
This shift, however, was more pronounced in regional banks that had less of a focus on commercial lending, the analysts noted.
Nevertheless, the costs of implementing the new standard, and the impact it may have on consumers’ ability to borrow, are worrying politicians.
In January, FASB chairman Russell Golden was giving evidence to the US House Committee on Financial Services’ subcommittee on investor protection, in which he was lambasted in particular by Republican Blaine Luetkemeyer, but also by Democrats.