The CECL Saga carries on - RapidRatings joins its many clients in the banking industry to pay close attention.
On October 5th, 23 of the 60 members of the U.S. House of Representatives Financial Services Committee, along with three other congressmen, released a CECL–focused letter addressed to FASB Chairman Russell G. Golden and to SEC Chairman Jay Clayton. In the letter, which had been circulated by Lee Zeldin (R-NY) and Ted Budd (R-NC), the representatives call on the SEC to delay CECL implementation, pending “much closer examination” by both the Board and the Commission of CECL’s impact on the US banking system.
These authors warn of a series of unintended consequences accompanying CECL as it is presently constituted: diminished availability of credit, increased cost of credit, shorter loan tenors, greater volatility in bank balance sheets, unwelcome changes in regulatory capital and loan loss reserve requirements. They stress what they see as a serious threat to consumers and to small businesses. They predict that, absent the delay they want, CECL’s consequences will be felt much sooner than the earliest effective date (2020 for SEC filers) as banks draw up their compliance plans and put them into place.
Chairman Golden and his colleagues in Norwalk will likely take exception to the phrase “much closer examination.” They would tell you that the process that led up to the Board’s release of ASU 2016-13 (Financial Instruments – Credit Losses) last year was as lengthy and as intense as anything they have ever been involved in. The origins of the project go back nearly a decade. FASB was so insistent on its careful deliberations that its original partner, the IASB, split off from the project and posted IFRS 9 in 2014 – a separate credit-loss standard set to take effect outside the US on January 1st, 2018.
RR’s readers will recall the blog post from this past June, after RR representatives came back from the Transition Resource Group (TRG) meeting at FASB headquarters. There had been press reports, ahead of the meeting, suggesting that new opposition to CECL would surface there. It did not. Official TRG Observers, attending from Washington, made clear in informal conversations then and later that they could foresee no substantive changes or delays in CECL on the horizon and no good reason for banks to hold back from earnest CECL preparations.
During an appearance at a Committee hearing on October 4th Chairman Clayton was asked directly by Representative Budd about CECL: “Is there a possibility that the SEC will stay this ruling at more length before going ahead with its implementation?” Mr. Clayton answered: “I can’t make that promise today.”
It remains to be seen if this letter from members of Congress changes the banking industry’s expectations. Any bank that puts CECL preparations substantially on hold because of the letter thereby assumes considerable risk of an eventual scramble to comply.