To Help Banks, Fed Delays Implementation Of "Biggest Bank Accounting Change In Decades"

At the end of January, the American Banker website, a proxy voice for the US banking industry, published a report explaining why in the author's view, the so-called CECL accounting standard (or Current Expected Credit Losses) is a threat to the financial system, and for good reason: it forces transparency into traditionally opaque bank balance sheets.

In a nutshell, the CECL, which has been dubbed "the biggest bank accounting change in decade", would force banks to recognize expected losses on loans from the day the loan is issued, in effect forcing banks to shore up capital and to reduce the likelihood banks would need a bailout (see Boeing after instead of investing $50BN in a rainy-day fund the company instead repurchased its own shares). Critics of this proposed accounting rule - mostly banks and their shareholders - argue that such draconian demands would make them reluctant to lend to all but the strongest borrowers, and would also cripple shareholders returns (naturally investors would much rather see the bank's cash returned to them instead of held in some Plan B fund for when times get tough).

As one can imagine, the critics (i.e. the banks) quietly took the upper hand, and their lobby in Congress was so powerful that among the various measures passed on Wednesday in the Senate was the unprecedented step of trying to force a delay to the implementation of CECL. The provision, which is expected to pass a vote in the House in mere minutes, would allow banks and credit unions temporary relief from the current expected credit losses accounting standard, and would give them until Dec. 31—or when public health officials declare the pandemic over, whichever comes first—to overhaul how they tally losses on souring loans. Large publicly traded banks were supposed to adopt the new accounting standard on Jan. 1.

As Bloomberg notes, while lawmakers have attempted to intervene plenty of times in the way accounting standards take shape, if the House passes the Covid-19 relief package and President Donald Trump signs it into law, it will be the first time Congress has blocked or delayed the work of the Financial Accounting Standards Board. Trump has said he supports the package.

"It’s not a good moment in FASB history,” said Jeff Mahoney, general counsel at the Council of Institutional Investors.

But it would be a great moment in banking history, and while banks have never been eager to adopt CECL, the economic fallout from the coronavirus outbreak brought fresh attention to their pleas for delays or outright changes. The fallout is stretching businesses and consumers thin, and as a result banks expect losses on loans would soar just as they are expected to recognize losses and short up the capital shortfall. Dealing with a new accounting standard that forces them to recognize expected losses the day they issue loans will jar already unpredictable earnings.

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So after that long preamble, moments ago we learned that we won't even have to wait for the House vote as the Fed took initiative, announcing at 12pm that federal bank regulatory agencies today that banks required to adopt CECL in 2020 can mitigate the estimated cumulative regulatory capital effects for up to two years.

In a press release from the Fed, it announced that "the agencies issued an interim final rule that allows banking organizations to mitigate the effects of the "current expected credit loss," or CECL, accounting standard in their regulatory capital."

As a result, banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years. This is in addition to the three-year transition period already in place. Alternatively, banking organizations can follow the capital transition rule issued by the banking agencies in February 2019.

In other words, the first and only major attempt to overhaul how banks record and account for loans, and especially impaired loans, has just been crushed by a virus.

The good news: banks and their shareholders can take delight that the notorious opacity for which banks are best known will continue indefinitely, and that since even more risk will be piled up, the next financial crisis will involve another taxpayer bailout of the banking sector.