Accounting Board Deals Banks a Setback -- WSJ

By Michael Rapoport 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 4, 2019).

Accounting rule makers on Wednesday rejected a proposal by regional banks to soften the impact of a change that will force banks to book losses on soured loans much faster.

The rejection means the accounting change - known as CECL, for current expected credit losses - will go forward as planned at the start of 2020 for publicly traded U.S. banks.

CECL will require banks to record all expected future losses on their loans as soon as they are issued. That will force some banks to boost their loan-loss reserves, cutting into earnings and regulatory capital.

Regional banks like Capital One Financial Corp., BB&T Corp. and Regions Financial Corp. had argued the need to book losses up front would discourage lending and worsen any future economic downturn. They have pressed their case with members of Congress and regulators, and last fall they urged the Financial Accounting Standards Board, which sets accounting rules for U.S. companies, to modify CECL to lessen its impact on earnings.

But the FASB voted down that idea Wednesday. FASB members said the banks' proposal wouldn't provide enough benefits to justify the cost, and that they had previously considered and rejected similar ideas.

Under the banks' proposal, only reserves for the first 12 months' worth of expected loan losses, instead of all future losses, would have been counted against a bank's net income. But the idea "just wasn't operable, " said FASB member Hal Schroeder.

A BB&T spokesman declined to comment; Capital One and Regions couldn't be reached for comment. Michael Gullette, an American Bankers Association official, said the FASB's rejection doesn't resolve "significant concerns about the impact this accounting change could have on banks and their ability to lend." A comprehensive study of CECL's effects is needed to address those concerns, he said.

The FASB adopted CECL in 2016, prompted by criticism that banks had booked losses too slowly after the 2008 financial crisis, because current rules call for banks to recognize losses only after there is evidence the losses have actually occurred. That had left investors in the dark about banks' true health, critics said.

Booking all expected future loan losses immediately means some banks will have to add substantially to their loan-loss reserves when CECL takes effect. JPMorgan Chase & Co., for instance, estimated in its annual report that the rule would lead it to increase its reserves by $4 billion to $6 billion, or 30% to 45%. Citigroup Inc. has estimated a 10% to 20% increase in its reserves, which would be $1.2 billion to $2.5 billion.

The FASB's move is separate from a step banking regulators took in December, when they agreed to allow banks to phase in CECL's impact on their regulatory capital over three years.

Write to Michael Rapoport at [e-mail]

(END) Dow Jones Newswires

April 04, 2019 02:47 ET (06:47 GMT)

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