Current Expected Credit Losses, or CECL, requires companies to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of a loan. This standard went into effect for large U.S. public companies in December 2019. However, the Federal Deposit Insurance Corporation (FDIC) approved a measure in 2018 allowing banks to take up to three years to phase in the impact of the rule on their regulatory capital.
Although bankers and lawmakers have been pressuring the Financial Accounting Standards Board (FASB) for years to delay implementation, the coronavirus pandemic could now complicate U.S. companies’ efforts to comply with CECL. Current market volatility is expected to make the implementation problematic for companies due to the difficulty in making predictions about credit risk, especially when relying on economic indicators for forecasting. It is also challenging to understand what each bank is currently doing and to compare across all banks, as there is really no way to draw on prior experience with pandemics. The economic uncertainty could cause higher-than-anticipated increases in credit loss allowances overall.
In an effort to help financial institutions tackle the fallout from this pandemic, the FDIC Chairman requested the FASB give large public lenders the option to defer implementing CECL. Thus, companies that decide to delay implementation would revert to the old model of recognizing losses once they have evidence the losses have been incurred. The Chairman also requested that FASB allow companies to avoid categorizing coronavirus-related loan modifications as troubled-debt restructurings, which would encourage offering leniency to customers facing the current economic stress. The FDIC and other federal and state banking regulators are encouraging financial institutions to work rationally with borrowers affected by the pandemic.
Additionally, these agencies have confirmed with the FASB that short-term modifications made on a good-faith basis, in response to the epidemic to borrowers who were current prior to any relief, are not troubled-debt restructurings. These modifications include payment deferrals, extensions, fee waivers, or other delays in payment that are insignificant. Although no immediate CECL deferral was confirmed by the FASB, this could provide further drive for those who think implementation should be delayed.
A recent draft of the coronavirus relief bill could provide temporary relief from CECL compliance. Ultimately, delaying the implementation of CECL would free up billions of dollars for financial institutions to lend to consumers and small businesses that have been greatly affected by the pandemic and need assistance most right now.
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