WASHINGTON–What will the pending CECL rules mean for banks in the U.S. once they are implemented? The United Kingdom’s banks may offer a preview.
In Britain, where the CECL standards are already in place, “banks are showing how similar rules create wild swings in profits depending on executives’ economic outlooks,” reported the Wall Street Journal.
For example, Royal Bank of Scotland took an extra £100 million (about $128 million) impairment charge in its third-quarter results late last week, blaming the chaotic state of the U.K.’s Brexit talks for greater economic uncertainty. One day earlier, Lloyds Banking Group, Britain’s biggest mortgage lender, had taken no extra charges for possible future loan losses in its third quarter, while earlier in the week Barclays reported an £86 million improvement in U.K. loan-loss charges versus the third quarter last year, the Journal reported.
“Impairment charges under the new rules are meant to give investors a better picture of the true current value of a bank’s loans,” the Journal observed. “The volatility they produce means that investors are already looking past them to assess underlying performance, though.”
The new international accounting standards are set to go into effect in the U.S. in 2020 has some banks worried about the large initial charge they might have to take at the time the rules are introduced, according to the Journal, which noted some European banks took large charges at the time, but none were big enough to leave them short of capital.
“But the rules are making results more volatile. Executives have to take account of an array of economic scenarios and many rely on external forecasts, but their assessment of these is subjective,” the Journal added.