Comptroller of the Currency Thomas J. Curry made a presentation at the American Institute of Certified Public Accountants (AICPA) Banking Conference on September 16, 2013 in which he expressed his support for the Financial Accounting Standard Board’s (“FASB”) proposed new standard on impairment measurement that would require banks to use a current expected credit loss (CECL) model rather than the currently used incurred loss model to measure asset impairment for financial accounting purposes. If FASB’s proposed CECL standard is adopted, banks will be required to use historical information, current conditions, and reasonable and supportable forecasts to estimate expected shortfalls over the lifetime of a loan. Comptroller Curry said that the incurred loss model, which requires a bank to wait until the occurrence of an incurred loss event, such as a payment default, to recognize an impairment “precludes banks from taking appropriate provisions for emerging risks that the bank can reasonably anticipate to occur” and results in banks delaying their recognition of losses. Use of the incurred loss model, said the Comptroller, results in banks making large loan provisions at a later time, and often in the midst of a credit downturn when the bank’s earnings are already in stress.
Comptroller Curry stated that banks of all sizes will need to be provided with a sufficient transition period to train their respective staffs and to reprogram their systems. The Comptroller noted that the OCC and other bank regulatory agencies are particularly concerned that the change to the CECL standard would have a significant operational impact on community banks and he stated that the OCC has “urged FASB to provide adequate implementation time for these smaller, less complex institutions and to modify disclosure requirements in light of the resource constraints these institutions face.”
Comptroller Curry conceded that adoption of the CECL standard would likely result in banks having to increase their reserves for loan and lease losses, but he stated the OCC projected that the increase in reserves would be in the 30% to 50% range system-wide (if applied at this time) and would not be likely to result in the more dramatic increases in reserves that other banking industry observers have suggested would be required.
The deadline for comments to the FASB regarding the proposed CECL standard expired on May 31, 2013. In addition to reviewing public comments, FASB is seeking to converge its proposed standard with the international standards proposed by the International Accounting Standards Board (IASB). The IASB’s approach is based on three “buckets” or stages in the life of a loan or other financial asset that correspond to the relative condition of the financial asset in question. It has been reported that FASB is aiming to issue a final standard regarding measurement of the impairment of a loan or other financial asset by July 2014.