The politics of CECL implementation

I had my first encounter with the Financial Accounting Standards Board in 1988. As a Congressional staffer, I had drafted a bill, at the request of several members of the Texas delegation of the U.S. House, that changed the GAAP (generally accepted accounting principles) treatment of performing loans where the underlying property values had fallen. Regulators were classifying loans and elected officials were hearing from their banks and thrifts.

The bill changed what were FASB 5 and 15 at that time. When the bill was introduced, FASB demanded a meeting with staff. FASB staff and board members came to Washington from Connecticut and told us that the bill was a horrible idea and must not become law. The tone of the meeting was, “We are FASB and we have been anointed by The Almighty to establish accounting standards that shall not be challenged by mere mortals.” The bill became part of the FIRREA law of 1989. (The accounting language was later changed in the 1990s.)

Thirty years later, FASB has again garnered the attention of the banking industry and Congress. Perhaps as a result of a sense of guilt about being blindsided by the Great Recession and the failure of more than 500 banks and trillions of dollars in costs to buttress the economy, FASB has made two new proposals. The first would require some additional capital to be set aside for leases. The second, with a much broader and costlier impact, is the current expected credit losses (CECL) accounting standard.

Bankers across Texas have told us how troublesome and expensive this standard will be. The FASB chairman says he believes that the benefits justify the costs, yet FASB failed to do a cost benefit analysis.

The procyclicality of CECL will lessen credit availability in an economic downturn. Because community banks have larger percentages of small business loans in their portfolio, they and their customers will be hit hardest in the next recession. The worry is that borrowers will need their lenders to work with them instead of facing delays because of the impact CECL will have on financial statements, according to a community banker writing in American Banker.

The main idea behind CECL is accurate economic forecasting. This type of forecasting has been historically difficult and elusive for years, even for institutions like the Federal Reserve and the IMF. CECL could also act as a disincentive to make longer term loans.

Congress has now entered the fray. Bipartisan bills have been introduced that would require a “stop and study” approach to CECL. The gist of the legislation requires that implementation be delayed until the potential economic effects are studied.

It is uncertain whether a Democratic House consumed with Trump investigations will act on a bill, but FASB has heard the grumbling and has delayed the effective date for CECL to January 2023 for non-publicly traded entities. This move just delays the cost and the pain.

FASB even enlisted the support of former FDIC Chair Sheila Bair. She wants Congress to stay out of the CECL debate and believes that CECL will help prevent another financial crisis. She fails to acknowledge that procyclical forces could actually exacerbate a financial crisis.

So, once again, emissaries of The Almighty are telling us to mind our own business.