FDIC Chairman Asks for Accounting-Policy Changes Due to Coronavirus
The regulator requested a delay of a new credit-loss standard for certain companies
The chairman of the Federal Deposit Insurance Corp. on Thursday urged an accounting rule maker to make delays or exceptions to certain accounting rules to help financial institutions tackle the fallout from the coronavirus pandemic.
In a letter, FDIC Chairman Jelena McWilliams requested the Financial Accounting Standards Board, which sets U.S. accounting standards, to give large public lenders the option to defer implementing a new rule on expected future credit losses. The companies that decide to delay implementation would revert to the old model of recognizing losses once they had evidence the losses had been incurred.
The rule, known as Current Expected Credit Losses, or CECL, requires companies to forecast expected loan-related losses as soon as a loan is issued. It went into effect for large U.S. public companies in December. The FDIC approved a measure in 2018 allowing banks to take three years to phase in the impact of the rule on their regulatory capital.
The economic uncertainty of the pandemic may cause banks to face higher-than-anticipated increases in credit-loss allowances at a time when they should be focused on lending to businesses and consumers, Ms. McWilliams said.
The regulator also sought a delay for certain lenders that were expected to adopt the rule after December 2022. Financial institutions are better off focusing on ensuring the safety of their staff, customers and local communities, Ms. McWilliams wrote.
Market volatility related to the pandemic is expected to make the implementation of CECL challenging for companies because of the difficulty in making predictions about credit risk, especially if they rely on economic indicators for forecasting.
Ms. McWilliams also asked FASB not to classify coronavirus-related loan modifications as a concession creditors can grant during troubled-debt restructurings. Companies want to avoid that classification on their financial reports, Ms. McWilliams said. Allowing companies to skip categorizing modifications as TDRs would encourage them to offer forbearance to customers facing economic stress during the coronavirus pandemic, she said.
In response to the letter, a FASB spokeswoman said the organization agrees with the need for close coordination with the Securities and Exchange Commission and banking regulators to address issues associated with loan modifications. “We’re also continuing to work with financial institutions to understand their specific challenges in implementing the CECL standard,” she said.
Lawmakers in the U.S. Senate and the House of Representatives introduced several bills last year in an effort to delay the credit-loss standard and study its potential effects. Those bills haven’t advanced beyond referrals to committees. Sen. Kevin Cramer (R., N.D.) on Wednesday introduced the latest bill, this time proposing the implementation of CECL be delayed until December 2024 for community banks.