The Federal Deposit Insurance Corp. (FDIC) on Thursday sent a letter to the Financial Accounting Standards Board (FASB) that urged the agency to delay implementation of a new accounting standard that is expected to significantly increase loan loss reserves at many of the nation's top banks.
The current expected credit loss (CECL) methodology requires banks to forecast losses over the life of a loan as soon as they originate that loan, and account for those losses as soon as the loan hits the balance sheet. It went into effect at the start of this year for all public companies that file with the Securities and Exchange Commission.
Under the old method, banks did not record losses on a loan until an event gave them reason to believe a borrower might not be able to make their loan payments.
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Prior to the coronavirus' impact on markets and the global economy, large banks were already bracing for a big increase in their loan loss reserves -- the funds banks set aside to cover loan losses and other related expenses.
For instance, JPMorgan Chase said it expected its total loan loss reserves to increase by 30% as a result of CECL, although banks have three years to phase those losses in.
"In view of the sudden and significant changes in the economy over just the past several days and the uncertainty of the future economic forecast, banks may face higher-than-anticipated increases in credit loss allowances," Jelena McWilliams, chairwoman of the FDIC's board of directors, wrote in the letter to FASB. "Further, the growing economic uncertainties stemming from the pandemic and rapidly evolving measures to confront these risks make certain allowance assessment factors potentially more speculative and less reliable at this time."
In the letter, McWilliams also asked the FDIC to exclude loan modifications related to the COVID-19 pandemic from being classified as troubled debt restructurings, which are when banks modify loan terms to provide relief to struggling borrowers.
