FASB to Vote on Benefits, Costs of New Loan-Loss Rules

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By Steve Burkholder

April 22 — Bankers and their regulators will be watching closely April 27 when U.S. accounting rule makers discuss why they want to proceed with a new standard on the reporting of loan and other credit losses.

The Financial Accounting Standards Board will formally weigh the benefits and costs of calling for new requirements on impairment of financial instruments. The American Bankers Association calls the proposal “the biggest change in bank accounting over the past 40 years.”

The rules will lead to bigger reserves booked earlier, bankers and credit union executives predict.

The 2008-09 financial crisis spurred the writing of the planned rules, which focus on banks' gauging of “current expected credit loss.” During the crisis, regulators and rulemakers cited loan losses being recorded “too little, too late.”

Two Dissenters Expected

Five members of the seven-member FASB are expected to support the issuance of the new accounting standard on credit losses. Two members—FASB Vice Chairman James Kroeker and board colleague Lawrence Smith—plan to formally dissent, sources in accounting rule-making circles told Bloomberg BNA.

FASB hopes to issue the new impairment rules in late June or early July.

Deferral of Effective Date?

FASB also will weigh whether to defer the effective date for publicly traded and other larger bank companies from 2019 to possibly 2020, as requested by ABA in an April 15 letter to FASB.

The bankers group proposed that non-public and smaller financial institutions be given one more year beyond the scheduled 2020 effective date for those entities.

The impairment proposal “has the potential to change the way many financial institutionsoperate—from granting and managing credit to budgeting and capital management.”

The new FASB standard “has the potential to change the way many financial institutions operate—from granting and managing credit to budgeting and capital management,” ABA's Donna Fisher, senior vice president for tax, accounting and financial management, wrote in the letter to FASB Chairman Russell Golden. Making systems changes for banks' tracking of loans warrants a longer time to shift to the new rules, the ABA's top accountant suggested.

Banker Group Writes to Regulators

Five days after she wrote to FASB's chairman, Fisher wrote to the chiefs of the federal banking regulatory agencies.

The April 15 letter to the accounting board and the April 20 letter to Federal Reserve Board Chairman Janet Yellen, Comptroller of the Currency Thomas Curry and Martin Gruenberg, head of the Federal Deposit Insurance Corporation, shared themes on what banks must do to prepare for applying the planned FASB standard, in the ABA's view.

Compiled by the bankers group in a list of “key cost-benefit analysis issues,” those measures by financial institutions include:

  •  developing and managing new databases;
  •  requiring more sophisticated “quantifying forecasts of the future”;
  •  a need for different credit metrics; and
  •  preparing for probable changes in auditing.

 

“In addition to the cost and benefit issues FASB needs to address, we believe it is important that the agencies evaluate the new standard's practical impact on bank capital,” Fisher wrote to the Fed, OCC and FDIC chiefs.

Fisher wrote to FASB's Golden that if the board believes the benefits of the new impairment model outweigh its costs, and the rules are cleared for issuance, ABA requests added time for transition “from the current 2019/2020 effective date” tentatively approved by the board in November (219 Banking Daily, 11/13/15).

Bankers: ‘Incremental Benefits Limited.'

The bankers group also stated that “incremental benefits compared to current practice” in credit loss accounting under the new FASB prescriptions “may be limited,” according to Fisher's letters to FASB and the banking agencies.

The accounting standards board's forthcoming rules reflect a shift from pegging loan loss reserves to incurred losses. Instead, companies would assess expected losses and set up reserves accordingly.

FASB prescribes what it calls a “current expected credit loss” model, abbreviated as CECL.

“Although CECL will eliminate the differences regarding estimated loss emergence periods, the range of reasonable loss estimates are likely to widen considerably because of the long-term forecast (based on management's assumptions) that is integral to the CECL model,” wrote the ABA's Fisher.

“Given this, CECL may not increase comparability among banks, but may likely reduce it,” she wrote. “For these reasons, as well as the increased measurement uncertainty inherent in CECL, many bankers question” whether the new FASB prescriptions for credit loss accounting “represent a substantial improvement” compared with current practice, according to an appendix to both the letter to FASB and the letter to the bank agencies.

A FASB spokesman told Bloomberg BNA April 22, in response to the ABA letter to Golden, that the board considers “all comment letters as part of its due process.” The spokesman, John Pappas, briefly described the agenda of the April 27 FASB meeting: discussion of costs and benefits, as well as the effective date for the forthcoming rules.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com

For More Information

The April 15 and April 20 letters from the ABA's chief of accounting policy are available athttp://www.aba.com/advocacy/commentletters/Pages/default.aspx under “2016.”