Harry Stahl, Director, Business and Solutions Strategy, Capital Markets Solutions, FIS
May 25, 2020
When the US government enacted the Coronavirus Aid Relief and Economic Security Act (CARES Act) to provide support for workers and small businesses and to spur lending to SMBs and households, it also gave large, public financial institutions a temporary reprise on implementing the new credit loss accounting standard (CECL). Instead of meeting this requirement by January 1, 2020, these institutions now have the option to delay implementation until December 31, 2020 or until the end of the coronavirus national emergency, whichever comes first. This delay provides an opportunity for forward-thinking firms to build competitive advantage while meeting the delayed compliance requirement.
Shortly after the CARES Act was announced, the Federal Reserve, FDIC and Office of the Comptroller announced an optional extension to delay the CECL’s impact on regulatory capital by two years. This move was to help mitigate the effects of CECL in regulatory capital and was in response to concerns that the new accounting standard’s impact on bank capital rations could constrain business and consumer lending at a critical time. The delay includes the original three-year transition period, so banks who move forward with CECL, could potentially put off incorporating its full impact on their capital for five years.
The delay of CECL is not surprising given the volatile credit climate, but while the implementation delay may be a relief, credit risk is clearly a critical issue now and going forward. So FIs should use this time to review, assess – and if necessary, overhaul – credit loss estimation methodologies, keeping CECL in mind.
Don’t let policy uncertainties and a three-year deadline tempt you to procrastinate. Financial institutions that choose to delay the CECL implementation risk falling behind competitors or heightened costs in a late rush to compliance. Forging ahead now will give FIs the opportunity to fully vet all approaches, shore up any deficiencies and maintain business as usual before their effective date.
In addition, since large, public banks adopted CECL on Jan. 1, the complexity of reversing course could be significant and financial institutions have to worry whether putting off CECL would trigger a poor reaction from an already volatile equity market.
Acting now to build a framework designed to handle the inevitable accounting and regulatory changes will give your bank the opportunity to begin CECL compliance with confidence and create a competitive advantage over your lagging peers.
Adopting CECL will of course require specific changes to data models, calculations, and accounting practices, sometimes involving multiple systems across your firm. At the same time, you are no doubt wrestling with a range of other inter-related issues– not just expected but unexpected credit loss, on balance sheet risk, off balance sheet risk, etc. By reviewing those changes in context of your broader business, you may find opportunities to better integrate your understanding and management of these risks, improve data quality across the firm, and save cost through streamlining implementation across the organization.
In short, think bigger to define a solution with bigger impact – invest to understand and manage expected credit loss and related issues, to make your systems more resilient to future regulatory change, and comfortably meet the new CECL accounting standard on the extended deadline.