The Financial Accounting Standards Board (FASB) continues to forge ahead with its plan to require banks to forecast and book current expected credit losses (CECL) over the life of loans without even an offsetting credit for expected interest income.
Bank regulators should not follow FASB down this dangerous path much as they did two decades ago. We are reminded of FASB’s ill-conceived mark-to-market accounting rules, which needlessly destroyed some $500 billion of bank capital in the U.S. alone and led to a global banking crisis and panic. As the saying goes: “Fool me once, shame on you; fool me twice, shame on me.”
CECL, as was the case with mark-to-market accounting, would be procyclical, meaning banks will be hit hardest in bad economic times when they can least afford it. It would also create a financial monoculture of risk that could deepen and prolong economic downturns when most banks’ balance sheets react the same way in a crisis.
We don’t have to guess about these things as we’ve been through them many times in the past, most recently in the financial crisis of 2008-2010. Why is it that we cannot learn and apply the lessons of the past?