Investors want new accounting standards, according to the FASB. Investors disagree.
A key proponent of changing the accounting rules for loan losses has a new argument: Investors have lost faith in the existing method.
Speaking to over 1,000 accounting professionals, Hal Schroeder, who has served on the board of the Financial Accounting Standards Board since 2011, emphatically called the current model of expected credit loss, or CECL, “big. improvement over the status quo ”.
Schroeder told the American Institute of Certified Public Accountants National Conference on Banks and Savings Institutions that the incurred losses method, which assumes that all loans will be repaid until a loss or a triggering event to occur is no longer relevant.
“Even in the absence of CECL, investors are making and will make their own estimates of expected losses,” Schroeder said. “Investors began to ignore GAAP allocations – making their own much higher loss estimates – 18 months before the onset of the last recession.”
Schroeder was even sharper in a question-and-answer session after his remarks.
The current standard is “clearly not helpful to the decision,” Schroeder said. “He is being ignored. Most investors, although they may not be telling you clearly… operate on a model much closer to an expected loss model… this is where we are with CECL today. “
The CECL, unlike the current standard, removes any threshold for losses, requiring lenders to project lifetime losses on a loan on the day it is recognized. It’s a sea change, and lenders and lawmakers have become increasingly reluctant as the conversion to the new standard – which is expected to begin Jan. 1 – approaches.
Several investors have questioned Schroeder’s claims.
“I think the question is considerably more complex than [his comments] would indicate, ”said Joseph Gladue, research director at Alden Securities. “I think there is a wide range of beliefs under which investors operate when it comes to assessing credit for banks.”
“That’s his opinion,” said Joseph Stieven, CEO of Stieven Capital Advisors, of Schroeder’s comments. “Most investors don’t like the CECL. … We are looking at absolutely all of that, and current GAAP “- generally accepted accounting principles -” is one of them.
Stieven, who has said he has disagreed with Schroeder on the issue for years, remains convinced that the CECL will restrict access to credit during a downturn. “This standard will absolutely push more people outside the banking system into subprime, payday loans and pawn shops.”
Mike Gullette, senior vice president of tax and accounting at the American Bankers Association, said the CECL would make lenders’ financial results “more opaque, not less,” saying three-quarters of investors oppose to the proposed standard. He also reiterated the association’s position. call for a quantitative impact study before the adoption of the CECL.
“An independent study will realistically examine how the CECL can impact borrowers, banks and investors to mitigate unintended consequences,” said Gullette.
A bipartisan group of lawmakers also called for a study while strongly criticizing the ECCL. At the same time, legislation to stop implementation was presented to the House and the Senate.
Other efforts to modify CECL have been unsuccessful.
In November, a group of leading regional banks, including BB&T, Capital One Financial, Fifth Third Bancorp and US Bancorp, put forward a proposal that would have created a two-tier allocation, with write-offs expected within 12 months passing through the profits. and longer-term costs included in other comprehensive income.
The FASB reviewed the plan at a roundtable in January before rejecting it.
Although he had no objection to a study being carried out, Schroeder made it clear that he was “opposed to stopping” the implementation of the ECSC.
“I believe that well-designed and well-executed independent studies… are an invaluable tool in setting standards,” added Schroeder. “And I think there should be more in the future, using real data as it becomes available.”
Despite the supposedly “dire” consequences predicted by CECL critics, Schroeder noted that only a handful of lenders used the FASB’s technical investigation department to ask questions.
Sagar Teotia, chief accountant at the Securities and Exchange Commission, reported a similar response to his agency’s offer to consult with lenders on CECL.
“The consultation flow has been relatively modest,” Teotia said.
Still, Teotia and other regulators have said they are eager to discuss the CECL with financial institutions.
“Reach out,” said Sydney Menefee, office of the deputy currency comptroller and chief accountant. “There is nothing our reviewers love more than talking about allowances. “