Remarks of FASB Member Hal Schroeder
Bloomberg Tax/Deloitte "Financial Instruments: The Way Forward" Conference
May 7, 2019
I’ll start with the standard disclosure . . . official positions of the FASB are reached only after extensive due process and
deliberations. In other words, what I am about to say are my views and only my views.
With that in mind, I’ll make a few observations about the FASB’s new standard that deals with accounting for expected credit losses—better known simply as "CECL."
Back on March 14th—for math lovers, it was Pi Day—I tuned into [a non-Bloomberg business channel]. One of the guests that morning was Mike Mayo, a well-known bank analyst.
He has a reputation for being a bit negative toward investing in bank stocks. In fact, he was bearish on the sector for 17 years!
Mike also has set up meetings for me to talk with investors about CECL. Having sat through those meetings, I know he’s heard a wide range of perspectives.
So, I couldn’t resist needling him with the following tongue-in-cheek email:
I heard your comments on [non-Bloomberg business channel] this morning,
but I was shocked at your recommendation to buy banks. Haven’t you
heard that CECL is going to ruin the economy and stop all banks from
lending!!!? Therefore, how could you be recommending banks with
less than 10 months to such impending devastation?
Happy Pi Day,
Why do I tell this story? Because reports of CECL’s destructiveness have been greatly exaggerated.
In fact, I strongly believe that CECL achieves the FASB’s mission.
That is, to provide investors and other users with better
decision-useful information. In turn, better information should
contribute to improved pricing and capital allocation decisions.
And, by extension, a safer financial system and a more resilient
I say this because—before I became a member of the FASB—I spent over 30
years auditing, advising, and investing in banks. I witnessed the
effects of five U.S. recessions and a collapse of the U.S. savings &
loan industry; as well as the collapse of banking systems in other
countries, including Mexico and Japan.
I’ve seen the devastating effects those events have had on friends and
on communities. Both at home and abroad.
When recessions hit: Businesses close. Workers lose their
jobs. Families lose their homes. It’s not a pretty picture.
While at the same time, others have prospered . . . including some
investors like myself. That’s because we saw trouble brewing—no
thanks to current GAAP. If you have any doubt, consider that
during virtually the entire crisis, "the market" valued banks well below
GAAP-based book value. In other words, investors were ignoring
GAAP numbers. Specifically, the loan loss reserves!
So, how did the FASB respond? Over the past
decade, Board members and staff have met with hundreds of financial
statement users, auditors, and regulators—and of course companies, both
financials and nonfinancials.
From the beginning, most agreed that GAAP’s "incurred loss" model was a
problem. The following excerpt from a 2009 speech by
then-Comptroller of the Currency John C. Dugan captures the consensus
"As painful as it may be, timely
provisioning to the reserve now is critical to staying ahead of losses
that are plainly projected to rise; failing to do so would only make
future problems much worse."1
Input such as this led the FASB to develop the new CECL standard. Please keep in mind:
And, based on the collective input from a wide range of stakeholders, we
sought to develop an accounting model that’s scalable, operable, and
can be successfully implemented by entities of all sizes. One
recent example: a "FASB staff Q&A" about using WARM . . . an
estimation method already familiar to many smaller financial
- CECL does not change the total amount of losses recorded . . . just the timing.
- CECL alone won’t prevent a recession . . . no accounting can do that!
- But CECL will provide "the market" with important early warning indicators about changes in credit risk.
As the FASB continues to monitor implementation efforts, what have we heard?
Some very positive developments including widespread improvement
of data quality, internal controls, and estimation processes.
We’ve also heard a chorus of concerns . . . from some . . .
about how small banks can’t afford to implement CECL because it’s too
costly and too complex. Those concerns are largely based on
misinformation provided by third parties . . . perhaps
unintentionally. To be clear . . .
CECL only requires a bank to take into consideration information that is
reasonably available. As one investor told us, "if a bank can’t
do CECL, I want to know that." Because otherwise how can they
properly price for risk?
- CECL does not require banks of any size to radically change how they’re already estimating loan losses.
- CECL does not require predictions 30 years into the future.
- And, CECL does not require an exhaustive search of all possible information.
Final thoughts. I agree with those that say,
community banks and credit unions didn’t cause the last crisis.
But I’ll add: they do swim in the same waters.
Regardless of how credit losses are accounted for, big banks will
survive the next crisis. The little guys will struggle, and some
won’t survive. They’ll be swept away by the next economic rip
tide. And that will hurt our economy . . . particularly those in
As an investor . . . I’d have been okay with keeping the status
quo. Frankly speaking, I made money estimating expected
losses. It gave me a competitive advantage.
But as an American citizen . . . I’m not okay with the status quo. No competitive advantage is worth keeping accounting that:
- in "good times" masks warning signs of rising credit risk, and
- in "bad times" is ignored.
1Remarks by John C.
Dugan, Comptroller of the Currency, before the Institute of
International Bankers, March 2, 2009, "Loan Loss Provisioning and