Study finds little connection between CECL rule, credit availability/lending standards

Federal financial institution regulators should continue to monitor the impact on regulatory capital of new accounting rules on current expected credit losses (CECL) – but, to date, those rules do not seem to have an impact on credit availability and lending standards, a study released Tuesday stated.

In a congressionally mandated study focusing on the impact on financial institutions of the Financial Accounting Standards Board’s (FASB) new rules on CECL (which are mandated to take effect for most financial institutions late next year), the Treasury Department found while credit availability declined and lending standards were tightened in early 2020, a link between those trends and the CECL framework due to the coronavirus crisis was difficult to discern.

“A definitive assessment of the impact of CECL on regulatory capital is not currently feasible, in light of the state of CECL implementation across financial institutions and current market dynamics,” Treasury stated in its report. “More information is needed before reaching conclusions concerning any potential changes to regulatory capital requirements that may be necessitated by CECL.”

The Treasury Department recommended that the banking agencies keep an eye on the CECL rule’s effects on regulatory capital and extend transitional relief as need. Additionally, Treasury suggested that FASB provide more study its CECL rule, in coordination with the banking agencies. It also recommended that the accounting group analyze the timing of the accounting recognition of fee revenues, and that FASB and the banking agencies reexamine the application of CECL to smaller lenders.

The Current Expected Credit Loss Accounting Standard and Financial Institution Regulatory Capital