FDIC proposes phase-in for CECL; directors seek info about concern among bankers, impact of standard

FDIC Chairman Martin Gruenberg opens discussion on proposed CECL phase-in rule.

A proposal to phase in the impact on banks of a new accounting standard for credit losses was approved unanimously for comment by the board of the federal deposit insurer Tuesday, in concert with similar proposals adopted by other federal banking regulators.

The Federal Deposit Insurance Corp. (FDIC) board issued the notice of proposed rulemaking on the phased-in adoption of the new current expected credit loss (CECL) accounting standard established by the Financial Accounting Standards Board (FASB, an accounting industry standards-setting group). The new standard, which incorporates forward-looking assessments in the estimation of credit losses at financial institutions, can be adopted as early as next year.

Under the proposal (issued for a 60-day comment period), the agency would revise its regulatory capital rules to give banks and other financial institutions the option to phase in the day-one effects of the CECL standard over a three-year period. The option would be available to institutions upon their adoption of the new accounting standard. Additionally, the proposal would revise the agency’s regulatory capital rules and other rules to take into consideration differences between the new accounting standard and existing U.S. generally accepted accounting principles (GAAP).

The FDIC proposal matches a proposal issued last week by the Federal Reserve; a similar proposal was issued Tuesday by the Office of the Comptroller of the Currency (OCC). All three agencies Tuesday distributed their proposed revisions.

“The forthcoming implementation of CECL has been a topic of much discussion by the banking industry from both large and small institutions,” said FDIC Board Chairman Martin Gruenberg, reading a statement during the board’s meeting. “While the impact that CECL will have on bank’s capital ratios is uncertain at this time, there is a possibility that the impact could be material for some banks, particularly if the implementation of CECL occurs during a period of economic stress.”

Gruenberg noted that the proposed rule’s three-year phase-in provision gives banks a transition period to deal with the changes in the accounting standard.

During discussion, Vice Chairman Thomas Hoenig pointed out that “advanced approaches” institutions will still have to report the impact of the standard on the footnotes of their financial statements, but other institutions will not have to as they transition to the new standard. (“Advanced approaches” is a framework requiring some banking organizations to use an internal ratings-based approach and other methodologies for calculating risk-based capital requirements for credit risk, and advanced measurement approaches to calculating risk-based capital requirements for operational risk.)

In other discussion, FDIC staff told Comptroller of the Currency Joseph Otting (in response to questions about bank feedback) that implementation of the new accounting standard is of significant concern to banks.

“We hear about it at every single session we hold,” said Doreen R. Eberley, director of the agency’s division of risk management supervision. “(Bankers) are worried about the unknown, how big their provision may need to be, as they have really actually quite a number of worries about the new accounting standard and what it means.”

Eberly said 8,000 bankers participated in a webinar on the topic sponsored by FDIC last month. Eberly said based on the input received during the webinar, community banks expressed concern about what the methodology would look like, whether it would really be scaleable, whether bankers would have to find their own models and the cost of implementing the standard.

Consumer Financial Protection Bureau (CFPB) Acting Director Mick Mulvaney, however, expressed “uncomfort” about the accounting standard itself. “I recognize I’m getting out of the CFPB waters here, but I know enough about financial services and accounting standards to be worried about the level of subjectivity here,” Mulvaney said. “If we’re telling banks they have to anticipate the future economic conditions that strikes me as being very subjective and what their future credit losses are going to be, there’s more subjectivity there.”

He said his impression has been that accounting standards are supposed to be subjective “so that you know you are following the rules.” He said his fear is setting up a standard that folks are not going to know if they are absolutely following the rules all the time or not. “If our interest is having banks hold more capital, we can do that.”

Gruenberg  pointed out that it was the FASB that established the CECL methodology.

FIL 20-2018: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rules and Conforming Amendments to Other Regulations