August 6, 2019
EXCERPT The FASB's CECL standards may be delayed in implementation for certain banks, but that doesn't mean they should delay in making any necessary changes to be prepared for the new accounting standards.
Smaller banks may be given as much as three extra years to get prepared for CECL implementation.
Banks and financial institutions have been bracing for CECL, but there may be a delay in implementation on the horizon.
CECL, or current expected credit loss, will change how financial institutions deal with expected credit losses. After the financial crisis over a decade ago, the need to hedge against any future risk became the center of attention, with regulatory authorities focusing on ensuring financial institutions no longer find themselves in a vulnerable position.
In an effort to do that, banks will soon be required to use data not previously used for accounting purposes and account for anticipated lifetime losses of loans at the time of origination.
In 2016, the Financial Accounting Standards Board (FASB) updated its accounting standards to include CECL as a replacement for current standards for loss accounting. These changes to accounting standards are designed to establish the appropriate level of reserves to adequately and comfortably cover any foreseeable credit losses.
Since the old method for accounting for expected credit losses was criticized for underrepresented future losses, the new changes from CECL would require financial institutions to beef up their capital levels to adequately cover expected credit losses.
The FASB's new accounting standards are applicable to any financial institution that issues credit. But such changes have been met with concerns from banks who will be forced to undergo what is perhaps the biggest change in the industry not seen in decades.
The need to go from an incurred loss framework to an expected credit loss accounting structure and ensure accuracy with banks' forecasting will be a challenge and could impact operational challenges. There's also the concern over the need to boost loan-loss reserves, which may eat into earnings and capital. Further, banks are concerned that such accounting changes could impact business and discourage banks from making loans.
Banks of all sizes are encouraged to strengthen their loan portfolios in anticipation of CECL standards.
But while the new CECL accounting standards are to come into effect in December 2019 for large public banks and SEC filers, the FASB recently proposed a delay for some lenders. More specifically, the board proposed a three-year delay for smaller public lending entities, a two-year delay for non-SEC-filers, and a one-year delay for nonprofit and private lenders.
Some bankers have called on the FASB to delay the implementation of CECL for banks of all sizes. The additional time would give the board an opportunity to deeply assess the impact that the new standard would have on banks' ability to adequately serve their customer base and protect their portfolios, especially if a financial downturn should occur.
It would also give stakeholders more time to learn more about how to operate under such changes, find more resource providers as needed, and develop more robust practices for controls.
As of right now, smaller banks and lenders may have been given more time to adjust their business and prepare for the significant changes that CECL will bring, but larger banks will still have to remain in compliance and adjust their portfolios as necessary come December when the changes are said to take effect.
Whether your entity is a large bank that has only a few months left to make the required adjustments or is among the smaller lenders that have been granted extra time before CECL takes effect, it's essential to keep a close eye on your loan portfolio and make any necessary changes by selling off lower-performing assets in exchange of acquiring stronger ones.
By doing so, your loan portfolio will be better able to weather any changes in the industry, as well as ward off the impact of any possible future economic downturn.
At Garnet Capital, we're well-versed in the successful sale and acquisition process of loan assets, and we're ready to partner with you.
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