FASB Proposes CECL Delay for Smaller Banks

Financial Services Law

Deciding that the benefit to smaller banks and other smaller financial institutions outweighs the lessening of transparency, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update to delay the effective date to implement standards on current expected credit losses (CECL) for certain small public companies, private companies and not-for-profit organizations. The proposal—which is open for public comment until September 16, 2019—would provide smaller banks additional time, until January 2023, to implement the standards until January 2023. 

What happened

CECL, the goal of which is to create greater transparency of expected credit losses, is a major accounting change for the banking industry that could significantly impact bank balance sheets and capital adequacy. Currently, banks are required to reserve for credit losses when losses are probable. In practice, banks usually reserve an amount sufficient to cover losses over the next 12 months. Pursuant to CECL, however, banks would be required to reserve for estimated credit losses over the life of the loan at origination. The practical effect of the new requirement will likely result in most banks increasing their reserves.

Prior to the proposal, not-for-profits, private companies and certain smaller public companies were facing a deadline of January 2021 or January 2022 for the switch to the CECL methodology. Smaller banks were struggling with the challenges of implementing the new accounting standard in time for the original effective date, however. If finalized, the FASB proposal would push back the effective date for such entities until January 2023. 

Based on an analysis by S&P Global Market Intelligence of currently operating banks, roughly 92 percent of financial institutions will be eligible for the three-year delay. While these banks are small (with only 7.5 percent of the industry’s total assets and 15.2 percent of the loans), they represent almost half (about 44 percent) of the institutions that trade on a major exchange, with a median institutional ownership of 26.5 percent.

The implementation of CECL, which requires banks to consider a broad array of historical, current and forecasted information to develop estimates of lifetime expected credit losses, is challenging for financial institutions of all sizes. While FASB has determined that larger, public financial institutions can overcome those challenges and implement CECL by January 2020, smaller institutions, including smaller public financial institutions, need three additional years to implement the CECL methodology.

This creates a dual system where 92 percent of financial institutions are relieved from providing CECL’s greater transparency of expected credit losses for the next three years, while larger public banks must implement CECL in 2020. The differences in credit loss methodologies and the resulting disparity in the level of reserves between larger and smaller institutions could become more problematic in the event of an economic downturn. This will also complicate any analysis or comparison between financial institutions and could impede financial institution M&A activity.

Why it matters

FASB has traditionally required public companies to adopt standards first, followed by private and other entities a year later to give them time to learn from the public companies’ implementation effort. With the CECL implementation, however, FASB has decided one year did not provide enough extra time for smaller companies, especially in light of the fact that even larger companies are still working on CECL implementation.

The proposal to delay the effective dates for smaller banks is open for public comment until September 16, 2019. 



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