Post COVID Recovery Poses a Test for CECL Compliance

May 11, 2021 at 10:30 am Leave a comment

There are two ways to prepare for your credit union’s transition to the Current Expected Credit Loss accounting standard, lovingly referred to as CECL, with which your credit union must comply starting in 2023: you can either be using this time to research your credit unions lending history and extrapolating lessons from the larger financial institutions that are already complying with a standard or you can continue to put CECL on the back burner in the hope that it will once again be delayed or eliminated completely for smaller financial institutions. If you choose the former approach then this blog is for you.

This morning, yours truly wants to highlight this article in the WSJ discussing the challenges faced by the banking behemoths as they determine how much to reduce their reserves. As the article explains CECL is complicating bank decisions on how much to reduce the reserves: “jumping the gun could be dangerous: Lowering reserves too quickly and then needing to rebuild them could hurt companies’ credibility and reduce income, accountants and advisers say.”

Even taking the historic nature of the economic shutdown into account, it is hard to believe that a huge spike in reserves wasn’t in part a reflection of uncertainty over the proper treatment of loans under CECL. According to the WSJ, in the second quarter of last year, banks had stashed away almost $70B compared to the $12B they had put aside at the same time in 2019.

Now they are reducing the reserves.  But the question of just how dramatically and quickly they should assume that the economy is recovering remains anyone’s—dare I say it— guess. Take for instance the most recent jobs report which was so underwhelming that even the U.S. Department of Labor acknowledged that the economy still has a steep hill to climb. Conversely, consumer credit is increasing and there is plenty of evidence out there that jobs are available for people who want them.

Put all these factors into your CECL blender and ask yourself if any of these macro-trends impact your credit union and if so how much? In many ways implementing CECL is trickier for medium-sized and smaller institutions than it is for the larger guys who know that their institutions will be shaped by larger economic trends that may not even touch your credit unions field of membership.

Those of you hoping for more CECL relief should mark your calendar for May 20th. The Federal Accounting Standings Board (FASB) will be holding a round table discussion on CECL implementation, a clear signal that it is open to making further changes. For those of you hoping that CECL never comes, keep your fingers crossed.

As for your faithful blogger, I remain a CECL contrarian who believes that properly implemented, it makes sense to adopt an accounting standard that recognizes that a certain number of your performing loans will end up being delinquent. That being said, however, CECL has emerged as a potentially significant counter-cyclical drag on economic growth. I wouldn’t be surprised to see pressure grow on the FASB to modify its requirements.

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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