Having your cake and provisioning for it: how CECL and IFRS 9 are fighting the last war
Accounting standards that make banks provision upfront for all expected loan losses are encouraging exactly what regulators don’t want to happen at this stage of the coronavirus crisis.
Here’s a little circle that seems to need squaring. Banks, pushed by regulators busy trying to avoid a repeat of the last credit crisis, have begun accounting for credit losses on the basis of what might be expected over the entire life of loans.
But now, in the middle of another crisis, regulators are telling banks that they should not be kitchen-sinking credit loss reserves for fear of cutting off the flow of credit to economies that desperately need all the help they can get.
The problem is that you can’t do one without doing the other. As Bank of America CFO Paul Donofrio said in April to an analyst who wanted to know if the bank was likely to see credit loss provisions get worse as the year went on: “If we thought we were going to have to add more reserve build in the future, we would have put it into this quarter. That’s how the rules work.”