The Federal Deposit Insurance Corporation is calling for a delay and rollback of an arcane bank accounting rule, which has loomed as a large dark cloud over firms seeking to lend money into an economy quickly sliding into recession due to the coronavirus pandemic. The FDIC’s potential regulatory relief could help banks in their current mission—which is to lend, lend, lend—as the economy shuts down and businesses large-and-small crave emergency capital to survive.
FDIC chairman Jelena McWilliams, on Thursday 19th March, asked to either delay or rollback the Financial Accounting Standards Board’s new current expected credit losses (CECL) accounting rules. The regulation, which was just beginning to be phased in by large lenders and regional lenders, is a far more stringent and punitive accounting of potential losses inside of bank loan portfolios, particularly in the event of a recession.
CECL has been the talk of bank CEOs, investors, and analysts for many months because it is expected to lead firms to account for far higher potential credit losses. It loomed as enormous accounting shock, which might cause lenders to stay on the sidelines or waste precious capital building provisions. But the recession is here now, and businesses are looking at a black hole in their treasury accounts that needs to be filled.
McWilliams wrote that today we are confronting new and uncertain challenges in view of the worldwide pandemic. The nation’s banking industry is responding to rapidly evolving business conditions that are unprecedented in our history. To support the industry’s efforts to focus on their employees and customers, he is encouraging FASB to take these much needed actions to allow banks to help their communities at this time of need.
The FCIC is seeking to exclude COVID-19-related modifications from being considered when determining a troubled debt restructuring (TDR) classification, which have to be provisioned for. As well, it aims to permit financial institutions currently subject to the CECL methodology to optionally postpone implementation. Finally, it is calling for a moratorium on the effective date of CECL for banks like small community lenders, which aren’t yet subject to the accounting change.
Small community banks are particularly important in combating the COVID-19 recession. They’re the lenders that many Main Street businesses around the country rely upon, many of which likely need relief.