CECL delay gives small banks more time to get ready

Small banks are likely to benefit from the proposed delay in the effective date of the Financial Accounting Standards Board’s new credit loss standard, allowing them to learn the lessons from larger banks that have already begun using the new rules.

Last month, FASB issued a proposed accounting standards update that would grant private companies, not-for-profit organizations, and certain small public companies extra time to implement the new standards on current expected credit losses (also known as CECL), leases and hedging (see FASB issues proposal to delay new standards). The CECL standard is currently set to take effect in January 2020 for SEC filers, except for small reporting companies, which are supposed to begin implementing it in January 2023. The proposal would push back the dates for all other public business entities from January 2021 to January 2023, and for private companies and nonprofits from January 2022 to January 2023.

CECL implementation readiness

Consulting firm Protiviti has found from clients that virtually all banks have begun implementing the CECL standard, but only about 20 percent are far along with the process of data collection, governance and model validation. Large banks are ahead of smaller ones in preparing for the standard. Smaller financial institutions will get some help from the extra time.

“My opinion is that it will definitely help, especially the smaller organizations that don’t have the firepower or bandwidth in the modeling space internally within their bank,” said Ariste Reno, managing director of Protiviti's Risk and Compliance practice, who focuses on commercial and retail credit. “I also think, because the CECL accounting standard is not overly proscriptive, it will give those smaller institutions, or institutions that don’t have the sophistication in-house from a modeling perspective, time to sort through how the larger banks have handled this. CECL disclosure requirements are quite extensive, compared to the current standard, so there will be a lot of information that those smaller institutions can take away from the CECL disclosure requirements of the larger institutions. That will also give them time to hear feedback from the regulators for the large banks, and just how the regulators might orient some banks to migrate toward slightly different approaches within CECL that make more sense or help with comparability across institutions.”

Protiviti recently hosted a regulatory panel on the topic of CECL, where participants included officials from the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. “It was very interesting to hear what they were saying, as well as how they anticipate coming into the first exams next year for those large public filers that have to be compliant,” said Reno. “It’s a learning exercise. The whole industry is moving in tandem and the regulators are getting up to speed on what to expect. They will obviously be providing feedback once they see the full rollout of CECL implementation by those large institutions. I think what will really filter through the system into the smaller organizations and into understanding the general regulatory perspective and market feedback. The smaller institutions will be able to benefit from that knowledge, which clearly the large institutions did not have.”

Despite efforts to derail the CECL standard, deferral of the effective date is probably the best that smaller banks can hope for, given all the effort FASB has put into the standard. It tried for years to converge the financial instruments standards with the International Accounting Standards Board, which came out with a somewhat different approach to accounting for credit losses and loan impairments in International Financial Reporting Standard 9.

“I do think that CECL is a given, and it aligns closely with the principles of IFRS 9,” said Reno. “I think it’s here to stay, although that could always change, but it doesn’t appear likely today. I do think there are some clear benefits for adopting CECL. It’s just the devil is in the details of how do you get it implemented and how do you really start to look at banks in the industry to see how the CECL standard is really impacting the investor view or the bank performance views. I think those are the biggest challenges. I don’t think that at this point it’s going to go away.”

The officials who spoke at the Protiviti panel didn’t seem to feel that the differences between the approaches to expected credit losses in IFRS vs. U.S. GAAP have presented that much of a problem so far for the big banks.

“I think the reason why is because IFRS 9 — from an approach perspective — was much more proscriptive, and it wasn’t as mysterious in some ways,” said Reno. “IFRS 9 was much more digestible by all the institutions. It clearly required data and a new approach, but the approach was very well laid out and not overly interpretive, meaning the way the CECL standard is written you do have choices as an institution, which provides greater flexibility. With IFRS 9, it was a much more ABC, three-bucket approach. You’re in one of these three buckets; this is how you should do it. The implementation still took time and energy and effort, but it was much more of a known quantity in terms of the end state than maybe CECL is viewed today.”

So far, Reno hasn’t seen a clear preference for IFRS 9 versus FASB’s CECL standard. “I haven’t really heard it discussed in that way in terms of preferring IFRS 9 versus CECL, but clearly IFRS 9 has a less complex approach,” she said. “I don’t think the two accounting standards are potentially meant to be battle lines. They are two different bodies, and I do think the larger institutions by going through IFRS 9 and getting all the data required for that were in a much better position to implement CECL, so in some ways they had an advantage because they were subject. If they already had international exposure and were subject to IFRS 9, which was implemented first, then that actually gave them experience from both a detailed data and modeling perspective, but also how long does it take and how much effort is required and those types of things to learn from.”

Even with the deferral, Reno advises banks not to wait much longer to get ready for CECL. “I would say, for those institutions that have the longer horizon now and don’t have to comply until 2023, there are some banks that I’ve spoken to that really haven’t started down the path to any meaningful degree,” she said. “I would say for those institutions to really start exploring modeling options, both internal and external vendors, and then to network as much as possible with both larger banks and peer banks of similar size to understand the pitfalls, the challenges, as well as what’s gone well, or what’s been relatively easy compared to expectations for CECL implementation.”

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