Moody’s predicts CECL will have limited impact on big banks
The new credit losses accounting standard is not expected to have a major impact on the loan loss reserves of most large publicly listed U.S. banks, according to Moody’s Investors Service.
In a new report, the New York-based credit-rating agency said the accounting change is unlikely to alter Moody's assessment of a bank's credit strength. However, the optional nature of some aspects of the new standard, also known as CECL because of the Current Expected Credit Losses model it uses, reduces investors’ ability to compare financial results across different banks.
Moody’s analyzed the banks' preliminary estimates in their third-quarter SEC filings and its conclusion largely reflects favorable macroeconomic conditions and the banks' current high capital adequacy.
CECL adoption is likely to cause most banks to increase their loan loss reserves and reduce capital slightly, according to Moody’s. However, under the credit agency’s solvency analysis, which considers both capital and reserves as loan-loss mitigants, banks' overall loss-absorption capacity will be essentially unchanged.
"The accounting change by itself is unlikely to change our assessment of banks' stand-alone credit strength,' says Moody's vice president Maria Mazilu in a statement Tuesday. "However, if a bank were to restore its capital ratios, or otherwise offset the impact of CECL, it would be credit positive."
However, Moody’s sees some problems with the new standard. Beyond capital, some of the negative aspects of CECL accounting, according to the report, include increased earnings volatility and decreased peer comparability, which may cause investor uncertainty and raise funding costs.