Here is something helpful that has surfaced amidst the fallout, pain and confusion of the global COVID-19 crisis. The implementation date for the all-too-simple in theory but not-simple-at-all in practice CECL accounting standard has been pushed back by the passage of the CARES Act for banks until the COVID-19 national emergency declared by the president ends or December 31, 2020, whichever is earlier. In addition, an interim final rule released by the FRB, OCC and FDIC on Friday, March 27th, now provides an option to delay the effects of CECL on regulatory capital for two years (in addition to the original three-year transition period for banks required to adopt CECL during their 2020 fiscal year). Banks opting to use both forms of relief would be subject to a modified transition period which would be reduced by the amount of quarters CECL was delayed due to the CARES Act. No relief was provided for non-banks who are otherwise required to follow CECL.
When CECL was first introduced what seems like four score years ago, regulators basked in the glow of a good deed well done. CECL, an egg-headed notion if there ever was one, purported to protect the public by making nefarious or reckless lenders book losses at the inception of a loan based on a complex model-driven notion that lenders can accurately predict life of the loan loss expectancies … who knew?! Why wait for any evidence of a real loss! In April 2019, we warned of the new standard’s impracticality, astronomical costs and that it was procyclical by reducing credit availability just when it is needed….like now.
FASB, for its part, opposed further delaying CECL’s implementation. CECL’s optional delay may mean that the financial sector can finally breathe a momentary sigh of relief. That is, until everyone realizes how much time, money and effort has already been spent towards implementing CECL in 2020.