Regulators offer CECL guidance to aid industry's adoption

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WASHINGTON — Four federal regulators have proposed an interagency policy statement intended to support implementation of the Current Expected Credit Losses accounting standard.

The proposed policy statement issued by the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the National Credit Union Administration describes CECL methodologies for determining allowances for credit losses “applicable to financial assets measured at amortized cost.”

Those assets would include loans held-for-investment, net investments in leases, held-to-maturity debt securities and certain off-balance sheet exposures.

The new standard developed by the Financial Accounting Standards Board, which essentially requires bankers to consider expected losses at closing over the entire life of a loan, has been much derided by the industry, particularly community banks. But the four prudential regulators will be responsible for enforcing it in their supervision of financial institutions.

"This proposed policy statement is intended to promote consistency in the interpretation and application of the ... [FASB's] credit losses accounting standard," the four agencies said in a joint press release.

The statement also would update prior concepts related to existing allowances for loans and leases that would remain relevant after CECL is adopted. After the standard goes into effect, the agencies plan to rescind original policy statements that will become outdated, the regulators said in their proposal.

The proposed policy statement would go into effect when a financial institution adopts the CECL standard.

The agencies are asking for public comment on whether the proposed policy statement appropriately describes the measure of expected credit losses under CECL, and if it clearly communicates supervisory expectations for validating expected credit loss estimation processes.

Comments on the proposal will be accepted 60 days after it is published in the Federal Register.

FASB unanimously voted Wednesday to delay CECL implementation for most financial institutions until 2023.

Yet banks that file with the Securities and Exchange Commission, except those defined as smaller reporting companies, will still need to convert to CECL on Jan. 1, 2020. All other institutions, including private banks and credit unions, will have until 2023.

CECL is likely to result in a sea change for loan-loss accounting since it will require lenders to record all expected credit losses when a loan is booked, instead of waiting until credit deterioration becomes apparent.

Critics have raised fears that the new standard would have a procyclical effect on lending, with institutions cutting back on lending as conditions worsen, potentially exacerbating the pain of economic slowdowns.

In addition to the interagency policy statement on CECL, the four banking regulators are also asking for public comment on proposed guidance related to Credit Risk Review Systems. The guidance “presents principles for establishing a system of independent, ongoing credit risk review in accordance with safety and soundness standards,” the agencies said in the joint release.

That proposed guidance would align with the Interagency Guidelines Establishing Standards for Safety and Soundness, and would describe a broad set of practices in a financial institution to form a credit risk review system that would be consistent with safe and sound lending practices.

John Reosti contributed to this story.

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CECL Loan-loss provisions Community banking Credit unions FASB Federal Reserve FDIC OCC NCUA