FASB just held its long-awaited public meeting on CECL. Contrary to the expectations of many, it was not a heated procession of opponents arguing against CECL from all sides. Rather, it was a gathering of interested parties, including several familiar TRG members, whose purpose was to address a single “Proposal.” FASB had received it on November 5th from 21 major financial institutions intent on diminishing the threat they perceived in CECL to the availability, price and tenor of credit to consumers and small businesses. These were themes that the ABA, all 50 state bankers associations and BPI had also addressed in nearly simultaneous public correspondence.
The Proposal calls for replacing CECL’s life-of-loan loss estimates with a new, much less punitive, three-part system: “(1) for non-impaired financial assets, loss expectations within the first year would be recorded to provision for losses in the income statement with (2) loss expectations beyond the first year recorded to Accumulated Other Comprehensive Income ("AOCI'') and (3) for impaired financial assets, lifetime expected credit losses would be recognized entirely in earnings.”
FASB’s handouts were a 16-page history of its CECL deliberations and outreach over the last decade, along with the banks’ 31-page description and defense of the Proposal. A FASB staffer began the meeting with a 20-minute recitation of that outreach – letters, meetings and conference calls in the thousands -- in pointed repudiation of recent Congressional critics.
Support for the Proposal came from bankers who said that the bifurcation of 12-month and longer loss estimates better reflected loan economics, where losses as well as earnings accrued over time, while also providing more useful information to stakeholders.
However, most bankers agreed that adoption of the Proposal would entail substantial operational stresses from the necessary changes in policy, procedures, model validation and controls – all requiring further delay in CECL’s effective date. Community bankers complained that these new burdens would swamp them, for little apparent gain on their end. (One community banker argued that her bank knew all its customers personally and did not have or need the data support that CECL and big banks required.)
Since the Proposals calls for first-year loss expectations to hit Income, critics expected it would induce gamesmanship. They asked how you distinguished between the 365-day loss and the 366-day loss. They asked how vigorous banks would be in surveilling Part 2/OCI loss expectations for transfer to Income versus “roll-forwarding” (staying within OCI).
Participants also deliberated as to whether bifurcation’s results would be best addressed by management’s explanatory presentation versus simple disclosure in financial statements. Participants suggested the Proposal would induce unwelcome Income volatility, more than the original CECL. When asked what time frames they expected to use for their “reasonable of supportable’’ forecasts of expected losses, before reversion to historical statistics, almost all of the bankers said “no more than three years.”
Citi’s representative did not welcome the Proposal – he said Citi had worked hard to get ready for CECL and wanted to get on with it.
Auditors made clear that they were ready for CECL as is, that the Proposal would increase their work load but that they would be ready for it, if FASB adopted it.
FASB’s decision to restrict the meeting to a discussion of the Proposal suggests that FASB may consider it to be a plausible alternation to its original Accounting Standards Update (2016-13). The discussion concluded with FASB staffers promising to report to the Board by quarter-end on this discussion, further outreach and the staff’s own updated recommendations.
Late in the morning the meeting addressed a second, very technical topic involving the recognition of losses and recoveries according to loan vintage (i.e. year of origination). It was not the main event.