Comments on CECL Effective Date for Non-Public Entities

Russell G. Golden

Chairman

Financial Accounting Standards Board
401 Merritt 7

P.O. Box 5116

Norwalk, CT 06856-5116

Dear Chairman Golden:

The American Bankers Association (ABA) appreciates the opportunity to comment on the Exposure Draft, Proposed Accounting Standards Update— Codification Improvements Topic 326, Financial Instruments— Credit Losses (ED). The ED proposes to change the effective date of ASU 2016-13 (also known as “the CECL standard”) for non-public business entities (non-PBEs) from December 31, 2021 to January 1, 2022 and to clarify that impairment related to operating lease receivables is out of the scope of the CECL accounting standard. ABA supports both aspects of the ED. ABA had previously identified challenges with the current effective date for non-PBEs2 and the change in the implementation date for non-PBEs will effectively afford the qualifying entities an additional year to implement CECL, consistent with the original intent of the Board. Additionally, all entities will benefit from the clarification that operating lease receivables are excluded from the scope of CECL.

With this in mind, however, this ED is one example indicating the CECL standard was issued without sufficient due diligence. Related to the ED, neither FASB nor the banking agencies (as reflected in their subsequent industry guidance to non-PBEs on the issuance of 2021 call reports) understood the implications on the timing of internal controls and processes that CECL would require. Far more importantly as it relates to due diligence, however, CECL will have far reaching implications to banks and consumers that are either unintended or were not sufficiently understood at the time CECL was issued. These implications are now becoming clear as regulators and bankers both proceed down paths toward implementation. Therefore, ABA urges FASB to share with bankers, regulators, and investors the analysis of costs and benefits, in compliance with FASB Rules of Procedure, prior to issuance of the standard. This analysis should then be updated with any new information learned through CECL implementation efforts thus far.

FASB Should Reevaluate CECL in Light of Increased Procyclicality

ABA believes that the major benefits and costs of CECL implementation, when viewed realistically, are far different from what was assumed. For example, reducing procyclicality of reserving was a significant concern of many stakeholders, including banking regulators. While CECL’s forward-looking reserving requirement is, in theory, designed to reduce procyclicality, practical application of CECL could prove to be more procyclical than the current accounting. This is due to the fact that, in the real world, neither bankers nor professional forecasters have perfect foresight and accurately forecasting a downturn in the economy has proven to be elusive, even for the most highly respected forecasting organizations. Had CECL been in effect prior to the financial crisis, significantly increased credit loss provisioning based on the contemporary professional macroeconomic forecasts available at the time would not have occurred appreciably earlier. Once an economic downturn was recognized, however, the forecasts indicated a deeper and longer recession than was actually experienced.

Therefore, at the bottom of the financial crisis, CECL-based credit loss provisions would have compounded the downturn worse than was actually experienced and longer than was actually experienced. Increasing procyclicality in the banking industry can have dramatic impacts to regulatory capital management and to consumers and businesses in the U.S. It is difficult to understand how FASB would approve CECL if it knew such consequences (which would clearly contradict the intent of regulators and other stakeholders) were likely.

FASB Should Reconsider the Costs of CECL on Community Banks

It is increasingly clear that the costs of CECL implementation to smaller institutions were vastly underestimated. It is true that the CECL standard does not require specific complex methods or equipment. However, as ABA explained prior to issuance of the standard, a reasonable implementation of CECL that allows a bank to analyze credit risk over the life of the asset requires significantly more data than banks maintain today, segmented in ways more detailed than segmented today, and analyzed in significantly different ways than they are today. Considering that auditing standards are considering increased scrutiny of accounting estimates, an assumption that small banks can merely update existing spreadsheets to comply with CECL is dangerous, as it sets those institutions up for failure in the long run.

The banking agencies are now beginning to understand that a reasonable implementation of CECL will require significant changes to technology and ongoing processes for all but the tiniest of banks. For example, in a February 2018 Federal Reserve/FDIC webinar (which also included personnel from the FASB staff and the Securities and Exchange Commission), banking agency personnel, for the first time, referred to the need to consider obtaining data warehouse capabilities and purchasing third-party credit loss data. In a webinar on July 30, 2018 the agencies acknowledged, for the first time, the need for greater segmentation beyond the call reporting lines. This also will require more resources than previously indicated. Such changes in messaging are likely due to continuing confusion among FASB and banking regulators on how CECL can be implemented. Held almost two years after the initial issuance of CECL, the February webinar emphasized a CECL calculation method that had been previously publicly discredited by FASB members themselves. This method has also been severely criticized in a recent paper published by a respected credit loss modeler.

Such criticism also puts into question whether FASB assumptions related to the costs of CECL auditing and the related supporting documentation continue to be reasonable. Outstanding exposure drafts that propose enhancing auditor skepticism and supporting documentation expectations over accounting estimates (of which the estimate of credit losses is one) could result in dramatically higher costs. Considering that certain smaller auditing firms have publicly embraced the calculation method just mentioned, until there is agreement throughout the auditing industry of the general auditing expectations under CECL, it is difficult to understand how FASB could have credibly considered such costs within its analysis of benefits and costs.

Costs to Community Banks Should Also Consider Costs of Capital

The confusion regarding CECL implementation at smaller banks is hampering these institutions’ ability to perform early estimates and understand the impact CECL will have on their institution. This is a significant problem as preliminary lifetime credit loss estimates indicate that allowance under CECL could require significantly more capital upon implementation for many community banks. For example, a recent study by StoneCastle Partners estimates that hundreds of community banks may need to raise up to $45 billion in capital merely in order to maintain compliance with regulatory capital requirements at the CECL effective date. ABA understands that regulatory capital requirements are not significant factors in FASB’s consideration of accounting standards. However, the related costs of capital could influence the support of CECL by both banking regulators and bank investors. Where industry regulators are unwilling to revise regulatory capital requirements in response to CECL, the related costs should be considered within the FASB analysis.

The CECL standard is a critical and challenging issue to the banking industry, as the expected credit loss provisioning that is required under CECL is fundamentally different than current accounting standards. There is confusion regarding CECL implementation and misunderstanding regarding the cost and impact to procyclicality. The combination of these factors is why the cost benefit analysis on the impact of CECL must be shared and updated.

Thank you for your attention to these matters and for considering our views. Please feel free to contact me ([email protected]; 202-663-5318) if you would like to discuss this in more detail.

Sincerely,

Joshua Stein