Last fall opponents of CECL (Current Expected Credit Loss) made one of their most strenuous efforts yet to derail the FASB initiative (ASU 2016-13 Financial Instruments – Credit Losses). They enlisted more than two dozen congressmen in an initiative to target the SEC Chairman – the one federal executive who could wield the most influence on their behalf. He responded with expressions of concern for their upcoming burdens but with no substantive encouragement about a move in their direction.
How CECL Opponents Struck in October
The path to FASB’s release of its CECL prescriptions in June 2016 proved to be long and hard. Banks and credit unions led vigorous campaigns in opposition over several years, campaigns that have continued in more muted form since the release. For CECL opponents, the most promising point in the continuing campaign appeared to come last October 4th, when 26 Republican congressmen, under the leadership of Lee Zeldin (R-NY) and Tedd Budd (R-NC), published a letter to incoming SEC Chairman Jay Clayton and to FASB Chairman Russell G. Golden. In the letter they called for delay in CECL’s implementation, in order to allow for further study of what they saw as the unintended and very unwelcome consequences of the new standard. (While 21 of the signatories, including Representatives Zeldin and Budd, were members of the House Financial Services Committee, it was not a Committee release.)
Why the SEC Chairman Has Confidence in CECL
No one expected the letter to change views at FASB, where the ASU had been the culmination of careful deliberations going back nearly a decade. Rather, CECL’s opponents took encouragement that the letter might move Chairman Clayton in their direction. A reading of the Chairman’s most recent commentary on the topic, however, suggests that it has not. The Chairman replied to Representative Zelden on December 7th in a letter that was not published at the time but that came into circulation in recent days.
In the December letter Chairman Clayton made clear that he supported FASB’s “…focus on the quality of information provided to investors to ensure continued investor confidence in the accuracy and quality of reported information, which is critical to capital formation.” He did acknowledge CECL’s prospective impact on regulatory capital requirements, which the congressmen had stressed in their letter. But then he went on to express his satisfaction in the continuing attention that is being given to this specific issue by the Basel Committee on Banking Supervision, the US Treasury and the Commission’s own Chief Accountant.
How the Bottom Line Reads
In other words, if CECL’s impact on bank capital is determined to be unfairly punitive, then it will likely be a matter of adjusting capital calculations, not of adjusting or delaying or dumping CECL.
What the Chairman Promised
Chairman Clayton concluded by noting that the Commission was actively monitoring the work of FASB’s Transition Resource Group for Credit Losses (TRG) and by promising that: “The staff has been and will continue to assess whether FASB's standard is having its intended effect of aligning reporting with management's analysis and whether there are any unintended negative consequences.”
What Conclusion to Draw
After reading Chairman Clayton’s statement, RapidRatings can only reiterate the conclusion it reached last October: “Any bank that puts CECL preparations substantially on hold…thereby assumes considerable risk of an eventual scramble to comply.”
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Opponents of CECL clearly succeeded in making Congress well aware of the risks they have seen in FASB’s sweeping new rules for estimating credit losses.
Dozens of congressmen went prominently on record with SEC Chairman Clayton to demand that he delay or discard the new standard.
In reply the Chairman nevertheless expressed his overall support for the changes.
Opponents can no longer reasonably defend delay in making their CECL preparations – especially SEC registrants, who will need systems in place for testing next year.