Just a few short months ago we took on the breathtakingly ill-conceived Current Expected Credit Loss (CECL) standard that the Financial Accounting Standards Board (FASB) proposed to implement starting in 2020. CECL will require major shifts in the way lenders model, forecast and reserve for future losses. It would materially drive up capital requirements, impair earnings and ultimately drive spreads higher to the borrowing community. And by the way, it would be pro-cyclical. If we were actually going to do these things (and we shouldn’t), an unelected financial standard setting committee is surely the wrong party to hold the pen.
The lending community screamed bloody murder, and for good reason. Luckily, the small banking community was at the forefront on this cri de coeur. While the money center banks may be one of our pols’ favorite whipping boys, everyone in politics loves the small banker (visions of Jimmy Stewart dancing in their reptilian brains) because those bankers made loans to their constituents, support their local community and, oh, by the way, made significant political contributions.
So, not surprisingly, last week, smaller public lenders and private lenders, received something of a reprieve as FASB proposed delaying CECL implementation until January of 2023.
At its July 17th meeting, FASB proposed simplifying the effective dates for CECL implementation into two ‘buckets’ (as opposed to the original three bucket setup). One bucket would be for SEC filing public companies, excluding smaller reporting companies as currently defined by the SEC. Companies in Bucket One will still be required to implement CECL by January 2020. Companies in Bucket Two, which includes smaller public companies, non-SEC public companies and private companies, will have until January 2023 to adopt the CECL standard. That represents two extra years for most of these companies and two years for the ‘big fish’ to work the kinks out of CECL and provide a framework for the smaller fry to follow. Of course those companies that so desire may always implement CECL earlier than required. The proposed changes are open for comment for 30 days – that is until Friday, August 16, 2019.
Along with pushing back the implementation date for certain companies, FASB also issued a helpful Q&A document last week that serves to answer a handful of basic questions around how CECL should be implemented. If we have to actually do this thing, I guess a little bit of clarity is not a bad thing. The real question is whether CECL should and will get a complete re-think.
Clearly it should. Whether it does nor not is a different issue and may largely depend on the outcome of the 2020 elections as well.
It’s unfortunate that large swaths of the lending community have now spent a ton of time and money beavering away on coming up on implementation strategy, but frankly the loss of time and lucre is a relatively small tax to pay for pushing CECL out a couple of years.
And there is a realistic hope that all of this goes away, that a better view of risk management will prevail and CECL will join other really bad ideas on the trash heap of history. But it’s not going to happen without continued engagement from the lending community and without continuing both technical and political engagement with our duly elected leaders. The best friend of a truly bad idea is obscurity and inattention. Sunlight is the best disinfectant.
So let’s not forget CECL and keep an eye out for Beany & CECL, Episode 3. It could be a doozy.