We recently shared an article with you written by us for the American Banker expressing our deep concern about the Current Expected Credit Losses standard (“CECL) and about the role played in setting accounting standards by the Financial Accounting Standards Board (“FASB”).
As you might know, FASB is a completely private sector board created in 1973 by the accounting industry without any meaningful oversight from Congress, the Administration, or the government agencies charged by Congress with regulating the financial system, including the Federal Reserve, the FDIC, the Comptroller of the Current and the Department of Treasury, and the National Association of Credit Unions.
FASB proposed in the 1990s to require financial institutions to adopt market to market accounting rules. The heads of the Federal Reserve Board (Alan Greenspan), the Department of the Treasury (Nicolas Brady), and the FDIC (William Taylor) unanimously spoke out against the proposed new accounting rules, arguing, correctly, that our nation had mark to market accounting rules before and during the Great Depression, and the rules were eliminated by President Roosevelt in 1938 because market based accounting was preventing a recovery from the Depression. There is no question in the minds of unbiased/knowledgeable observers that FASB’s mark to market rules (mislabeled by FASB as “fair value accounting”) forced regulated financial institutions to needlessly write off $500 billion of private capital at the beginning of the economic downturn in 2007-2009. This $500 billion write down created massive instability in the financial system and wiped out roughly $5 trillion of lending capacity, forcing Congress to enact the $700 billion TARP program. We need to put the accounting rules governing our nation’s federally insured depository institutions back into the hands of the SEC, which must be required to work closely in developing and overseeing these rules with the Federal agencies charged with supervising our nation’s critically important financial institutions.
William M. Isaac
Time for Congress to put an end to CECL
by Scott A. Shay
The Financial Accounting Standards Board is considered by people who actually do business to be ridiculously out of touch.
Sadly, FASB has proved this again. The FASB seems to spend its time deriving increasingly more fiendish and complex accounting standards. These new rules place an even heavier burden on the private sector, with little regard for cost versus benefit or practicality for a typical company. Neither does it recognize relevance to banks and investors who use the financial statements.
The FASB standards best suit the largest corporations: those that have large accounting staffs and can afford to pay a myriad of consultants and modelers to cope with the latest pronouncements. The recent FASB-induced fiasco is the imposition of its so-called Current Expected Credit Losses accounting standard, with a first quarter 2020 implementation that comes at the worst possible time.
The CECL standard requires U.S. companies to pretend to employ prophets as it mandates that banks predict and set aside reserves at the closing of loans for potential losses throughout the life of the loan.
In the absence of certifiable prophets, firms must hire modelers to make predictions over extremely long-term periods. These models are typically very precise and broadly inaccurate. And the models do not relate to the changing real world, especially what is confronting businesses and the economy now — a massive recession induced by COVID-19.
According to the FASB, these models have to be constantly tinkered with over time and will presently force banks to significantly reduce their capital. With CECL, capital is reduced in bad times and increased in good times.
It is exactly the type of pro-cyclical accounting that any country should avoid for its own good.
Contrary to the objective of all the stimulus efforts being put forth by the U.S. government and the private sector, the CECL standard will likely reduce loans which could have otherwise been made during this crisis.
The CECL is built in a way in which the effects will continue to reduce lending by decreasing capital in accelerating amounts as loan loss reserves are added. Therefore, the deeper the COVID-19 recession gets, the less capital CECL will make available for lending.
Even with this clear and present crisis, FASB is moving full steam ahead with its implementation.
There are bills in Congress designed to delay or abolish CECL. But the fact that the FASB has not taken one step to at least delay CECL is astonishing.
One wonders if the FASB is so socially distanced from the real world that they think they are living on another planet, and are merely clinically curious about the crisis happening to everyone else. In fact, it is the FASB’s own actions, or inaction in this case, which will make the crisis worse.
Furthering the problem, the CECL standard could become more difficult to compare results across U.S. banks and financial institutions; or at least between the U.S. and the rest of the world.
The multitude of employed reserve methodologies make comparison almost impossible. The FASB, undeterred by any of this, seems so convinced by its own brilliance that it has ignored the groundswell of many comments from practitioners and investors who’ve overtly pointed out the obvious issues in creating such a model-intensive component of financial statements.
Congress must take action to help rebuild the economy without spending even one dollar of taxpayer funds: abolish CECL.
Scott A. Shay
Chairman and Co-founder, Signature Bank of New York