As Prepared for Delivery on July 30, 2020
Thank you, Mr. Chairman.
Approaching two years ago, Larry Fazio, Alison Clark, and I, along with representatives of the banking agencies, met with the then Chair of the Financial Accounting Standards Board (FASB), Russ Golden, and the principal architect of the proposed current expected credit loss (CECL) rule, Hal Schroeder. I noted to Mr. Golden and Mr. Schroeder that there were a number of approaches to addressing our concerns with the proposed CECL rule.
For example, among other responses, the FASB could exempt credit unions and other community financial institutions from the rule, recast the rule in a less burdensome manner, or simply delay the implementation of the rule for further analysis. We also noted that Congress could act to modify CECL or to overrule its implementation. While no doubt worthy of consideration, these approaches were substantially outside the jurisdiction of the NCUA.
My goal for the meeting was not merely to rehash what everyone already knew, but to make actual progress on the development of a realistic approach to reducing the burden on credit unions from the implementation of CECL while maintaining the integrity of audited financial statements and the regulatory capital determinations relied upon by the NCUA for safety and soundness purposes. During the meeting and in follow-up communications, I outlined two fundamental challenges presented by the proposed CECL rule:
- The projected compliance cost for credit unions and other community financial institutions in administering CECL was excessively and disproportionately burdensome given the size, complexity, and risk presented by these financial institutions; and
- The day-one charge to regulatory capital triggered by the implementation of CECL would inappropriately decrease capital without a justifying commensurate increase in the loan loss risk applicable to credit unions and the NCUSIF. Far from a mere technical accounting change, this reduction in capital would most likely lead to a restriction in the ability of credit unions to make loans and extend credit to their members.
Regarding the first item, the FASB has taken helpful steps to allay some of the financial burdens associated with implementing CECL. Fortunately, under this guidance, many community financial institutions are no longer charged with retaining the services of expensive economists and financial consultants in calculating their loan loss reserves under CECL. This commonsense approach reflects the relative simplicity and transparency of the loan portfolios often held by credit unions and other community financial institutions.
Concerning the second issue, I initially proposed that the NCUA permit credit unions to amortize their day-one CECL charge over a ten-year period, and not the three-year term we are proposing today. Although the longer amortization period parallels prior standards employed by the FASB, the banking agencies adopted the much shorter three-year amortization period and due to statutory constraints we may not exceed that timeframe. While no doubt of benefit, I would have preferred a longer amortization period of the day-one charge for credit unions and other community financial institutions.
Although we have made some progress concerning the structure and implementation of CECL, at the end of the day, the rule serves as an exceedingly complex mechanism by which to increase loan loss reserves. Given the dramatically adverse economic fallout from the Great Recession, CECL offers an unsurprising approach for the FASB to mandate for the too-big-to-fail and other significant and mid-tier financial institutions. The trickle down of this tedious and costly rule to credit unions and other community financial institutions, however, is far more problematic. Surely, from my perspective as a CPA for over 40 years, there’s a simpler and more elegant approach by which to reflect the audited financial statements of these institutions in accordance with GAAP and without impairing regulatory capital or safety and soundness.
Without diminishing the significance of the foregoing, I will support today’s proposal as it permits credit unions to amortize the day-one accounting charge over a three-year period instead of absorbing all of the charge directly into regulatory capital on day-one. In the interim, I encourage the NCUA to work with the banking agencies and the FASB to craft a credit loss rule that is specifically tailored and targeted to the loan loss risk actually presented by credit unions and other community financial institutions. Otherwise, CECL may have a chilling effect on the ability of these institutions to extend loans and other credit to their members and customers. Ironically, this burden will fall disproportionately on those who were the absolutely least responsible for the Great Recession — the underserved, the unserved, and those economically challenged and of modest means.