A controversial accounting standard is facing strong resistance in the House Financial Services Committee that will likely intensify when Democrats gain control of the panel.
At a Tuesday hearing of the committee’s Financial Institutions and Consumer Credit Subcommittee, the Current Expected Credit Losses standard, or CECL, was the target of sharp criticism by lawmakers from both parties, including prominent Democrats Brad Sherman and Gregory Meeks.
The Financial Accounting Standards Board finalized CECL, which would require financial institutions to record a loan's projected lifetime credit loss on the day it is originated, in June 2016. The standard has faced a steady drumbeat of criticism ever since.
Sherman, who has represented a district in Los Angeles County since 1997, claimed CECL would handicap small businesses seeking credit.
“Every day there is a struggle for capital between Main Street and Wall Street, between those who get money from banks by issuing a bond and those who have to come beseeching you for a loan,” Sherman said. “We should not allow FASB to adopt a standard that biases ... against Main Street in favor of Wall Street.”
Meeks, who represents a district in New York City, expressed concerns that the cost of converting to CECL would accelerate a decline in the number of community banks in communities he serves, leaving constituents with few palatable financial alternatives.
“Banks are closing up in my district right now," Meeks said. "I don’t want my folks to have to go to payday lenders.”
Since the Financial Accounting Standards Board is a private organization, Congress lacks the leverage it has over the bank regulators — a fact Sherman bemoaned.
“We’ve delegated power to the SEC, which then delegates power to FASB,” Sherman said. “By comparison, the Federal Reserve is a populist organization. The Fed comes here to discuss its policies far more often than FASB.”
Even so, the fact a large, bipartisan group of lawmakers, as well as three of the four witnesses who testified, spent much of the two-hour, televised hearing heaping criticism on CECL can only ratchet up pressure on FASB to alter or delay the standard before its three-year conversion process kicks off in January 2020.
Indeed, Brendan Nosal, Sandler O’Neill’s director of equity research, suggested in a Wednesday research note to clients that the hearing made it “somewhat more likely that implementation of the standard is delayed and/or substantive changes are made.”
The American Bankers Association, in a statement Tuesday, called for a delay and pushed for a quantitative impact study to gauge CECL’s impact on bank earnings, capital ratios and the availability of credit.
Sherman also backed calls for delay.
“We need to see FASB provide quantitative impact studies and field testing before they turn the economy on its head or any sector of the economy on its head,” Sherman said.
For its part, the standards board said CECL was the product of a years-long process that included extensive consultation with banks, along with detailed cost-benefit analysis.
“To develop CECL, the FASB conducted a rigorous process of extensive stakeholder outreach and analysis,” spokeswoman Christine Klimek said Tuesday in a statement. “FASB has continued that process since issuing the final standard — including the creation of a transition resource group, whose members include financial institutions of all sizes.”
Klimek said FASB is continuing to study a
“The FASB staff is conducting research with the banks that have asked for that reconsideration as well as other stakeholders,” Klimek said, adding the board would discuss the proposal at a public meeting late in the first quarter.
While Capital One was one of the 21 banks to propose the change, its chief financial officer, Scott Blackley, said it might be preferable to do away with the standard.
“Dodd-Frank and the post-crisis regimes are doing the job they were built to do,” Blackley told lawmakers during testimony at Tuesday's hearing.
"We have a very well-capitalized banking system," Blackley added. "CECL is redundant to that. It’s harmful. I believe there is significant evidence that suggests it is going to exacerbate economic downturns. Given that, I believe we need to change or eliminate CECL or adjust the capital regimes to reflect that fact.”
Bill Nelson, chief economist at the Bank Policy Institute, and Joe Stieven, CEO of Stieven Capital Advisors, also argued that CECL would exaggerate booms and busts.
Lenders will, out of necessity, rely on forecasts to generate projected loan losses, witnesses said. Forecasts are much more apt to confirm prevailing conditions, especially during downturns, rather than predict turns in an economic cycle.
“When stuff hits the fan, there’s a race to assume the worst,” Stieven said.
Mark Zandi, chief economist at Moody’s Analytics, was the only witness to speak in support of the standard. While he acknowledged that CECL would be procyclical, Zandi argued that current standard — where banks can only book losses after a loan shows signs of deterioration — is more procyclical.
The current standard “opens the floodgates in the good times and really restricts the availability of credit in bad times,” Zandi said.
European banks have been implementing an accounting system similar to CECL for the last year with few ill effects, Zandi said.
“Let’s just take this step,” Zandi said. “This is a very good step. It’s not as complex as people are claiming. There’s a lot of flexibility here so that small banks and credit unions can adopt this very painlessly. ”
