Concern over CECL accounting standard emerges as focal point during Fed chief’s House appearance

The “current expected credit loss” (CECL) accounting standard became a focal point of interest during a House hearing Wednesday featuring the chairman of the Federal Reserve Board, as did rules adopted by the central bank to implement the standard.

During the question-and-answer portion of the hearing before the House Financial Services Committee, Federal Reserve Board Chairman Jerome H. (“Jay”) Powell was asked repeatedly by committee members about the impact of the standard on financial institutions, businesses and consumers.

The standard, which replaces the existing incurred-loss methodology for certain financial assets, was adopted by the Financial Accounting Standards Board (FASB) in 2016. It governs for accounting purposes the recognition and measurement of credit losses for loans and debt securities. It requires an estimate of expected credit losses over the life of the portfolio to be effectively recorded upon origination.

The standard is scheduled to go into effect this year for some financial institutions, and for others in following yeards. However, this month, the federal banking agencies adopted a final rule – which takes effect April 1 – that provides the option for financial institutions and firms to phase in over a three-year period the day-one regulatory capital effects of CECL standard.

Nevertheless, committee members peppered Powell with questions and comments about the impact of the standard, and the rule adopted by the agencies.

Rep. Nydia Velazquez (D-N.Y.) wanted to know if the Fed has conducted a review of the economic impact of the accounting standard, particularly in a downturn, on low- to moderate-income borrowers. After pointing to the three-year phase-in regulation, Powell said the Fed was “doing everything we can to avoid a big change that disruptive to lending, and we will be watching carefully to see what the actual results are.”

Velazquez was not mollified, however, and pressed her concern about the negative impact of the standard on credit availability for low-income borrowers and small businesses. “We’re aware of those concerns, and will be watching to see if there is such an effect. We don’t expect there will be such an effect,” Powell said.

Rep. Brad Sherman (D-Calif.) – an accountant by profession – asked if the Fed had considered performing a “qualitative impact study” on the effect of the CECL standard, particularly with regard to its disruptive impact on lending during an economic downturn. Again, Powell responded, the Fed did not think that the standard would have that effect. The standard, he said, has “really been under discussion for a decade now. It’s really a decision that FASB made and we’re just implementing. If we find that it does have effects like that, then we’ll take appropriate action.”

On the other side of the partisan aisle, Rep. Blaine Luetkemeyer (R-Mo.) told Powell that CECL was “of most concern to him this morning.”

“There seems to be a growing concern not only among bankers but among consumers” and industry groups, he told Powell, as they begin to grasp the costs to them of the standard. He asked Powell if he shared those concerns, particularly with regard to access to credit.

“We know that regulation does have a cost, and that’s why we try to make it as efficient as we can, and no more burdensome than it needs to be,” Powell said. “I think on CECL, we have put a lot of resources in trying to understand how it will affect the behavior of banks.” Again, Powell noted, the Fed would be watching the impact of the accounting standard very carefully.

“Well, I know from Wall Street to Main Street, nobody likes this rule,” Luetkemeyer said, adding that – in his view – the accounting standard is unnecessary. “I’m very concerned about this; there’s a growing groundswell of concern out there and I hope that you take this into consideration,” he said.