The world is a vastly different place now than when the current expected credit loss accounting standard was first imagined. In 2016, when CECL was introduced by the Financial Accounting Standards Board, many in the financial services industry raised concerns about the unintended consequences its implementation would have.
The following excerpt from the National Credit Union Administration’s final rule on CECL underscores the idea that it will be difficult to understand up front all the implications to regulatory capital of applying the new standard.
“While the report affirms the Department of the Treasury’s support for the goals of CECL, it also acknowledged that a ‘definitive assessment of the impact of CECL on regulatory capital is not currently feasible, in light of the state of CECL implementation across financial institutions and current market dynamics.’”
The stakes are even higher today because, under CECL, loan growth can hurt net worth (and return on assets) in the short term. And many credit unions have seen a material decline in their net worth ratios over the last two years—to which they will apply the new accounting standard. So loan growth could reduce net worth ratios even further in the near term.
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