Calls for CECL delay expose standard's flaws

By William M. Isaac and Thomas P. Vartanian

The Federal Deposit Insurance Corp. chief has fired up what could be the opening barrage in the war over accounting supremacy.

Specifically, FDIC Chairman Jelena McWilliams urged the Financial Accounting Standards Board to suspend or defer the adoption by banks of the new Current Expected Credit Losses methodology for recording losses.

When or if CECL becomes effective, it would require a bank to estimate and book the losses it might incur over the life of a loan. The bank would not be allowed to estimate and book the interest it would receive on the loan even though that is a much more certain calculation than estimating losses.

Consider the absurdity of federal agencies, such as the Federal Reserve, the FDIC and the Comptroller of the Currency, having to go to FASB hat-in-hand to protect the financial integrity of the U.S. banking system.

All hands are on deck in Washington as policymakers are trying to determine how long the pandemic will last; how many lives will be lost or debilitated as a result; and how devastating the economic damage might be.

And yet, the federal agencies established by Congress to implement protections over the banking system and economy must go on bended knee to a self-appointed group of accountants (FASB), who are not subject to government oversight or regulation, not even the Administrative Procedures Act and Freedom of Information Act.

McWilliams’ March 19 letter to the FASB underscores what critics have been arguing for years.
CECL may be its own pro-cyclical pandemic. McWilliams argues in the letter that in such a time of financial distress, “the growing economic uncertainties stemming from the pandemic and rapidly evolving measures …make certain allowance assessment factors potentially more speculative and less reliable at this time.”

There could not be a better testimonial in support of the argument that CECL is ill conceived, and highly dangerous to the economy and the banking system.

The financial integrity and solvency of the banking system needs to be in the hands of those ultimately responsible for its safety and soundness: the regulators appointed by the President, subject to confirmation by the Congress. If that had been the case in 2007, banks may not have suffered the arbitrary financial devastation that (FAS-157’s) mark-to-market accounting imposed at the worst possible time.

The market panic beginning in 2008 caused severe declines in the asset prices of investments held by banks and other financial institutions, which were required to be written down across interconnected financial markets. To the extent that TARP’s $700 billion of taxpayer funds were used to offset losses created by new accounting conventions, it certainly qualifies as a mistake not to be repeated.

Accounting principles are not the equivalent of theological dogma. They have a real-world financial impact. When these accounting standards have aberrational impacts on bank balance sheets, they drive financial strategies and limit the amount of available credit.

In instances where accounting principles artificially affect the ability of banks to take long-term risks, they can undermine the very purpose of banks in society.

Individual consumers are not able to as efficiently take duration and interest-rate risks; they depend on insured banks to do so for them. If banks are discouraged from assuming and managing those risks, the economy cannot grow.

It is way past time to impose greater government oversight on the creation of financial accounting principles. The experiment with FASB over the years has been a mixed bag at the very best.

The coronavirus economic rescue package currently under consideration by Congress makes the case. First, if CECL were not considered to be problematic and procyclical, it would not be singled out for suspension as it has been.

Second, neither Congress nor the banking agencies determine GAAP accounting, the provision waiving temporary compliance with CECL does not dictate that auditors stop applying it as required by the FASB when they certify financial statements.

The Financial Stability Oversight Council created by the Dodd-
Frank Act in response to the financial crisis should be the governing body over all accounting rules proposed by FASB when they are applied to insured banks.

Alternatively, rules promulgated by FASB should be overseen by the Federal Reserve, the FDIC and the Comptroller of the Currency. Either way, the need for government oversight of FASB is essential and urgent.

William M. Isaac, a former chairman of the FDIC and Fifth Third Bancorp, is co-chairman of The Isaac-Milstein Group.

Thomas P. Vartanian, a former regulator at the OCC and the FHLBB and then counsel to many financial institutions, is executive director and professor of law of the Program on Financial Regulation & Technology at George Mason University’s Antonin Scalia Law School.