WASHINGTON—The Financial Accounting Standards Board's (FASB) current expected credit loss (CECL) standard will have a negative impact on community-based financial institutions, said witnesses and lawmakers during a House Financial Services subcommittee hearing this week on the subject.
The impact CECL will have on financial institutions and the economy was the topic of a Financial Institutions and Consumer Credit Subcommittee hearing. This accounting standard requires financial institutions – including credit unions – to record expected losses whenever they make a new loan.
“This is causing concern within the industry as it could mean financial institutions may have to either raise more capital or lend less,” stated NAFCU, which has told FASB, lawmakers and regulators that credit unions should not be within the scope of the standard.
‘Especially Difficult Time’
Hearing witnesses, including Joseph Stieven, CEO of Stieven Capital Advisors LP, and Bill Nelson, executive vice president and chief economist at The Bank Policy Institute, both noted that larger financial institutions are having trouble preparing for this standard and said smaller financial institutions – especially those focused on small-business lending and other services typically offered by smaller institutions – will have an especially difficult time complying with CECL.
NAFCU Executive Vice President of Government Affairs and General Counsel Carrie Hunt earlier outlined credit unions' concerns regarding CECL in a letter to the subcommittee ahead of this week’s hearing, noting that it "is an unnecessarily complex accounting method for credit unions and only adds to mounting regulatory stress."
Application of the CECL standard to credit unions continues to be inappropriate, CUNA wrote to the subcommittee ahead of the hearing.
“CECL is intended to address delayed recognition of credit losses resulting in insufficient funding of the allowance accounts of certain covered entities. However, underfunding of allowance accounts has not generally been an issue for credit unions,” the letter reads. “Further, the typical user of a credit union’s financial statements is not a public investor—such as with large, public banks—but instead is the credit union’s prudential regulator, the NCUA.”
Other Concerns
CUNA’s letter notes, in addition to the direct effect the standard will have on credit unions’ financial positions, credit unions remain concerned about the compliance burden that comes along with it.
“We share these ongoing concerns in hope that FASB will take advantage of future opportunities to adjust the standard with an eye toward reducing the compliance burden on credit unions... we believe more can and should be done to ensure entities are able to comply with the standard,” the letter reads. “We ask this committee to convey the industry’s concerns to FASB in hopes it will review the standard for opportunities to reduce unnecessary compliance challenges as well as develop compliance resources in coordination with prudential banking regulators, including the NCUA.”