Washington D.C. — This afternoon, Bill Nelson, Chief Economist for the Bank Policy Institute testified before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. At the hearing titled “Assessing the Impact of FASB’s Current Expected Credit Loss (CECL) Accounting Standard on Financial Institutions and the Economy,” Bill discussed BPI’s research that finds CECL is procyclical and that during a recession CECL will dissuade banks from residential mortgage lending, small business lending, and lending to non-prime consumers.
“CECL loan loss accounting will not only be procyclical, it will also disproportionately affect home mortgages, student loans, small business loans and loans to households with less-than-pristine credit histories,” said Bill Nelson, Chief Economist at Bank Policy Institute in his testimony. “Had CECL been in place during the financial crisis, we estimate that banks’ capital ratios would have been 1½ percentage points lower in the third quarter of 2008. Those lower capital ratios would have reduced bank credit supply in the crisis by an additional 9 percent, significantly worsening the recession.”
In October, BPI sent the Financial Stability Oversight Council (FSOC) a letter requesting that the FSOC work to evaluate the systemic and economic risks posed by CECL and engage the Financial Accounting Standards Board (FASB) and regulatory agencies to seek a delay in CECL’s implementation.
The letter notes BPI’s concern that the implementation of CECL could undermine financial stability in a future recession or financial crisis, as its requirements establish disincentives for banks to extend credit, especially during stressed economic conditions. These same requirements are likely to adversely affect the availability, structure and price of credit, with a disproportionate impact on residential mortgage, small business, student, and unsecured term and non-prime lending.
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The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.
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