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Banks Turn Against Congress’s Virus Relief From Loan-Loss Rule

April 7, 2020, 5:25 PM

Congress made waves when it inserted a measure in its massive coronavirus relief package that put the brakes on when banks have to comply with the biggest change to their accounting in decades.

But once banks learned the nitty-gritty details of the CARES Act (Public Law 116-136; see BGOV Bill Summary)—and then regulators’ interpretations of the law—they started saying “thanks, no thanks” to the change they’d asked for. Some are saying they’ll just go ahead and follow the current expected credit losses (CECL) accounting standard as written.

“It seems like a lot more trouble than it’s worth” to take advantage of the relief, said Jon Howard, senior accounting services consultation partner at Deloitte & Touche LLP’s national office. “I don’t know how many people are really that excited about this deferral anymore.”

One section of the $2 trillion stimulus package President Donald Trump signed into law March 27 included an unprecedented measure: overruling U.S. accounting rules and giving banks more time to overhaul how they account for bad loans. It offers them the option to wait until Dec. 31 or when the coronavirus national emergency is declared over— whichever comes first—to add up losses on souring loans. Large publicly traded banks were supposed to adopt the unpopular new standard on Jan. 1.

Questions from the get-go

Almost as soon as the president signed the bill, the questions started.

The Securities and Exchange Commission answered one of the big ones one week later. SEC Chief Accountant Sagar Teotia said in an April 3 statement that banks would still be in compliance with U.S. accounting rules if they opted to take the delay Congress offered.

This was important because the SEC requires businesses to follow U.S. generally accepted accounting principles, and the relaxed deadlines of the CARES Act conflicts with the deadline set by the Financial Accounting Standards Board, the author of U.S. rules.

But that left other critical questions. If the president declared the pandemic over mid year, would banks have to drop everything and follow CECL on that date? Would they start it on the closest filing date? Would they potentially have to rework their numbers from the beginning of the year?

SEC officials answered those questions and others in a call with an expert panel at the American Institute of CPAs plus representatives from five accounting firms Friday, said Howard, who was on the call and wrote up a widely circulated summary for Deloitte.

It boiled down to this: if a bank adopted the standard mid-year, it would have to adopt CECL in its next quarterly financial statement and also calculate losses under the standard back to the beginning of the year—Jan. 1 for calendar-year companies.

Meaning: no real relief. The strict interpretation stunned some participants on the call.

“So once this is over, you then in your very next set of financials show CECL as if you’ve been applying it the whole year,” Howard said.

The SEC and FASB both declined to comment. EY LLP posted its summary of the conversation with the SEC on Monday and gave the same synopsis as Deloitte.

Less-than-great expectations

Even before the SEC weighed in, banks were becoming less excited about Congress’s unprecedented move to put the brakes on FASB.

Many banks were disappointed about the final language in the law. They had pressed lawmakers for a longer delay, at least 12 months after the national emergency was declared over. They also wanted it to apply to all businesses that must follow CECL, such as insurance companies and automakers with captive finance arms like Ford Motor Co. — not just banks and credit unions.

Dozens of mid-sized banks, ranging from from Ally Financial Inc., to Wintrust Financial Inc., on March 19 wrote letters to the House and Senate leadership, calling on Congress to delay the standard until 2024.

Developed in the aftermath of the 2008 financial crisis, the new standard makes banks record the losses they expect the day they make a loan. It differs from outgoing rules that only let businesses book losses when they have strong evidence that losses have happened, like missed payments. It aims to eliminate rosy-looking balance sheets during tough economic times.

Booking losses before they happen dings bank earnings. It also forces them to shore up the capital they must set aside to meet separate requirements from bank regulators. Banks can’t touch that capital to do day-to-day business.

Banks, especially mid-sized banks, expressed worries about the new accounting almost as soon as FASB published it in 2016. The economic fallout from the coronavirus pandemic put these worries on overdrive. As bankers warned the future was impossible to predict and FASB ignored their requests for accounting breaks, they set their sights on Congress.

The same day the president signed the bill into law, the three federal banking regulators issued an interim final rule offering significant relief to how banks could calculate capital under the new accounting method. It would delay for two years CECL’s impact on regulatory capital, followed by a three-year transition period.

‘They’ve made a mess’

Banks toying with the idea of taking the optional deferral saw little incentive to do so once the bank regulators weighed in on March 27, said Garver Moore, managing director at Abrigo, a consulting company that helps banks implement the new standard. The conversation changed “overnight,” Moore said. The regulator intervention helped soften the new accounting’s impact on capital, fixing a top concern.

Even before that, banks that invested three years or more to gather data, assemble special teams, hire consultants, and install new accounting systems weren’t keen on making a switch, said Ariste Reno, managing director at Protiviti, another consulting firm.

“It’s potentially a very short-term delay and why would you go back and forth when you’ve already invested all this time?” Reno said. “All of your processes, your staff, your board, your management team is geared toward this new way to estimate.”

Ally, one of the banks that signed the letter to lawmakers asking for a delay until 2024, said in a regulatory filing Monday that it was electing the relief bank regulators offered. It said it had adopted the new accounting rule on Jan. 1—right on time.

The questions that cropped up and the ensuing confusion after Congress intervened in FASB’s work is the reason why politicians shouldn’t tread on the rulemaker’s turf, said Terry Warfield, accounting department chair at the Wisconsin School of Business and a trustee of the FASB’s parent organization from 2013 to 2018.

“They probably took a letter from a bank lobbyist and said, ‘Let’s just do this’,” Warfield said. “They’ve made a mess of it.”

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com; Bernie Kohn at bkohn@bloomberglaw.com

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