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Regulators to Offer Flexibility on FASB Credit Loss Standard

September 26, 2018

When it comes to the Financial Accounting Standards Board’s (“FASB”) credit loss standard, Federal Reserve chief accountant Joanne Wakim said regulators want to give banks flexibility when estimating their expected losses on loans and securities. At the American Institute of Certified Public Accountants’ National Conference on Banks and Savings Institutions this week, Wakim echoed the FASB’s statements that there is no single method to help banks estimate loan losses, and financial institutions should take several factors into account. She also said banks could continue to use current methodologies with changes to inputs and assumptions.

Further, Wakim said regulators will not specify how much loan loss reserves should increase. She remarked that regulators have no plans to set benchmarks, and sometimes a bank’s allowance may even drop under Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. If they do, Wakim said examiners will want to know what caused the decrease.

Despite providing banks flexibility, Wakim said regulators still plan to discourage or block actions that do not follow the credit loss standard. Additionally, she discouraged banks from relying on the same forecast period they use for the Comprehensive Capital Analysis and Review (“CCAR”). Wakim warned that while following the new standard could result in the same forecast period, the reasoning could not be that a bank is applying the same forecast period as CCAR.

Wakim’s comments were one day after Securities and Exchange Commission chief accountant Wesley Bricker offered advice to banks on implementing the credit loss standard. Bricker also met with lawmakers and banking representatives to address their concerns regarding ASU No. 2016-13.

Publicly traded banks must comply with the FASB credit loss standard in 2020; other banking institutions must apply the standard in 2021.