WASHINGTON — Banks were able to get temporary backing from Congress for two key regulatory relief initiatives in the recent coronavirus rescue bill, but the industry hopes to build on that momentum and make the relief permanent.
On top of funds to make loans to small businesses, the $2 trillion stimulus package contained an array of bank reg relief measures, including a temporary halt to an unpopular loan-loss accounting standard and a temporary easing of a community bank capital ratio. Both expire at the end of the year or when the public health crisis ends.
Yet lawmakers could face pressure to grant additional extensions as those deadlines approach or risk adding to banks' regulatory burden with the economy still fragile. Analysts say the temporary measures in the Coronavirus Aid, Relief, and Economic Security Act open the door to lawmakers providing banks longer-term relief.
Banks "are obviously going to keep pushing for" making both measures permanent, said Ian Katz, a director at Capital Alpha Partners. "And it’s a real opportunity because they essentially got what they wanted on a temporary basis.”
Bankers have long wanted to put an end to the Financial Accounting Standards Board’s new Current Expected Credit Losses standard. CECL took effect at the beginning of this year, but large banks have the option to defer adoption until Dec. 31 or when the national emergency is declared over, whichever comes first. Likewise, the industry had also pushed to lower the community bank leverage ratio by a percentage point to 8%, which was also granted temporarily.
“Certainly banks have been pushing for the suspension and elimination of CECL for a long time,” said Katz. “Community banks were pushing to get that leverage ratio lowered from 9% to 8%." (CECL will not affect smaller banks until 2023.)
Some observers said it will be hard for Congress to walk back the relief after having stated support for the measures on a short-term basis.
That dynamic is similar to the challenges policymakers faced following the 2008 financial crisis when they neared deadlines on temporary provisions. For example, a temporary increase in federal deposit insurance above the previous limit of $100,000 kept getting extended until the current $250,000 limit was made permanent by the 2010 Dodd-Frank Act.
Isaac Boltansky, director of policy research at Compass Point Research & Trading, said the temporary reduction in the community bank leverage ratio could foreshadow future action.
“There will be a more pronounced fight as that framework is still fluid and the inclusion of the lower threshold will be framed as an explicit statement of congressional intent,” said Boltansky.
Similarly, in a research note, Katz said of the deadline for the CECL provision, "We're skeptical that sticks."
“A further suspension of CECL seems likely," Katz said in the note Tuesday. "Some kind of long-term softening of the standard is possible, though we wouldn’t be shocked if it gets scrapped altogether.”
In addition to the changes in the CARES Act, the bank regulators separately said institutions that had been required to convert to CECL this year could delay the corresponding capital impact until 2022.
Policymakers who previously supported eliminating CECL say the temporary measures bolster the argument for permanent action.
“The inclusion of a short-term CECL delay is a good start, but there is more to be done. This provision acknowledges the procyclical nature of CECL is a threat to our economy and the ability for small businesses to access credit when they need it most," said Rep. Blaine Luetkemeyer, R-Mo.
Industry representatives say permanent relief from both CECL and the community bank leverage ratio is worth considering as the coronavirus continues to take a toll on the U.S. economy.
"The recovery from this will be long and banks are certainly looking at every option from a regulatory standpoint to be able to continue to work with their customers,” said James Ballentine, executive vice president for political affairs and congressional relations at the American Bankers Association. “So whether it’s the leverage ratio or CECL, which we have been actively involved in well before this occurred, we will be engaging with Congress and the regulatory agencies to address those issues and many more.”
Ballentine said the requirement under CECL that banks predict loan losses at closing was already difficult enough in a strong economy. It would be even tougher for banks to comply with that standard in the midst of economic turmoil, he said.
"In the best of times, it would be challenging for CECL, but in the worst of times, meaning when there’s a turn or a negative turn in economic conditions, it will become even more challenging for banks to have to set aside reserves for loans that are much further in the future,” Ballentine said. “And we are exactly in that point of time where the examples that we were using have actually come to pass.”
Katz said bankers could be successful in making their argument, given that lawmakers from both parties and other financial regulators have been receptive to criticism of CECL. In a rare move,
“The industry always made these arguments that it would be procyclical and it would hamper lending in a crisis,” Katz said. “Certainly that fear resonated with Congress and with regulators, at least the FDIC. They can make the argument that this didn’t work in a crisis.”
With regard to the community bank leverage ratio, industry representatives say the latitude given to regulators to change the minimum standard is unsustainable. The 2018 regulatory relief law gave regulators the discretion to set the ratio somewhere between 8% and 10%. Regulators initially set the ratio in the middle, at 9%, but bankers complained that that was too high.
“There’s no sense of having your capital whipsaw back and forth,” said Paul Merski, executive vice president of congressional relations at the Independent Community Bankers of America.
He added that
Katz said the fact that lawmakers saw a need to reduce the community bank leverage ratio by a percentage point during the pandemic bolsters the case for keeping it at 8% in the future.
“There will be this debate or discussion over the pros and cons of having this one point higher or one point lower,” Katz said. “Certainly the fact that there was believed to be a need to reduce it does help the argument for the banks.”
