March 1, 2019

What Lenders Need to Know About CECL


Will big changes be on the horizon for the accounting laws on Current Expected Credit Losses (CECL)? At a recent roundtable meeting hosted by the FASB, some banks and lenders pushed back on the new standard that's to take effect early next year, asking the FASB to reconsider modifying the new model, while others are in favor of it proceeding. So, what will the FASB do with the concerns raised?

A recent roundtable meeting between bankers and the FASB resulted in a clash of views over the new CECL standard set to take effect next year.

Changes to the accounting laws on the Current Expected Credit Losses (CECL) model are expected to take effect as of the beginning of 2020, though such modifications are being met with significant concerns from bankers.

The Financial Accounting Standards Board (FASB) will be holding a big meeting in March in Norwalk, CT to discuss if or what it will do to potentially alter these accounting standards.

Recently, the FASB gathered with the country's four largest banks as well as regional banks to discuss concerns over new CECL standards for reserving for loan losses, which is to come into effect January 1, 2020. CECL uses expected losses to recognize and prepare for future credit losses.

The big banks seemed to be at odds with regional banks in terms of the implementation of this new accounting law. While the big-wigs are in favor of proceeding with the new law, the regionals seemed to take a completely different stance on the subject, urging the FASB to delay such an implementation until concerns have been heard and addressed.

The CECL standard was introduced by the FASB following the 2008 economic debacle when debt-based loan portfolios quickly crashed, showing that the incurred loss approach to identifying loan losses was flawed. That put investors in a precarious position, leaving them with little time to adequately respond.

CECL was developed to ensure that banks and lenders adopted a stronger approach to better anticipate and reserve for potential losses. Under the regulation, financial institutions will be required to carefully assess their historical information and market data to build up adequate capital reserves and establish forecasts accordingly.

This could impact the amount of capital that would be available to lend and the cost of such loans. While such increases in capital could help improve soundness of financial institutions, it could limit the availability of lending capital and end up costing consumers more.

While the FASB is planning to implement the new CECL model at the beginning of 2020, opponents are pushing back on such a rollout.

Many investors don't see a reason to pinpoint differing amounts of anticipated credit losses. Instead, they're in favor of an accounting model that provides information on the entire amount of credit losses expected. They also believe that using other means of identifying the full amount of expected credit losses would further blur the lines between objective and subjective estimates.

Some banks at the recent meeting held by the FASB stated that it would be challenging to revamp their current expected credit loss models while still being in compliance with the new standard that is slotted to take effect early next year.

The FASB has stated that it has been working with regulators to establish educational platforms to get all financial institutions on board with the standard.

No matter which direction this accounting standard takes, it is crucial for lenders in all realms to take a proactive stance to manage the purchase and sale of loans on their balance sheet. And a seasoned advisor on your side, such as Garnet Capital, is essential for this process.

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