The state credit union system offered support for mitigating the day-one effect of the current expected credit loss (CECL) accounting standard on capital levels, but also offered a number of changes to the proposal by NCUA in a comment letter sent this week.
In July, NCUA proposed a rule to phase in the “day-one adverse effects” that could result from credit unions’ adoption of the CECL standard – set for most credit unions to begin no later than December, 2022 – that would be phased over a three-year period (or for 12 quarters).
The agency said the phase-in would only be applied to those federally insured credit unions (FICUs) that adopt the CECL methodology for fiscal years beginning on or after Dec. 15, 2022 (the deadline established by the Federal Accounting Standards Board (FASB) for CECL implementation).” In other words, those credit unions that choose to adopt CECL for fiscal years prior to the 2022 date, the agency said, will not be eligible for the proposed phase-in.
FICUs with less than $10 million in assets under the proposal would no longer be required to determine their charges for loan losses in accordance with generally accepted accounting principles (GAAP), but would instead be allowed to use any reasonable reserve methodology, “provided that it adequately covers known and probable loan losses.”
NASCUS’ letter outlined some changes to the provisions for the smaller credit unions, including that those which implement CECL should be given the option to phase in the day-one effect. NASCUS also argued that credit unions that reach $10 million in assets after Jan. 1, 2023 should be afforded the opportunity of a three-year phase in of the day-one effect.
“As NCUA notes in the Supplemental Material, many states have state specific rules that require compliance with Generally Accepted Accounting Principles (GAAP) for FISCUs with less than $10 million in assets,” NASCUS wrote. “State credit union supervisors in some of those states have statutory or regulatory authority to waive GAAP, or otherwise to pass the benefit of the proposed rule through to FISCUs with less than $10 million in assets. However, there are several states that require GAAP for all FISCUs regardless of size, with neither exception nor discretion for waiver or use of a federally prescribed alternate standard.”
NASCUS wrote that the agency’s final rule should make the proposed three-year phase in available to credit unions that must follow GAAP, regardless of the size of the credit union. However, for smaller credit unions whose state laws preclude them from using a non-GAAP measure “should be eligible for the three-year phase-in for their regulatory capital calculation.”
As for smaller credit unions that surpass the $10 million asset threshold during the transition period, NASCUS urged the agency to amend its rule to give those credit unions a full three-year phase in.
NASCUS made two other key points:
- Larger credit unions (those with assets of $10 million or more) should have the option of recognizing the full day-one effect of CECL immediately: “NCUA’s proposed rule and the federal banking authorities’ (FBAs’) final rules differ: the FBAs have provided covered banks the choice of whether to phase in the adverse day-one effect of CECL or to fully implement and recognize CECL cost on day one. NCUA’s proposal would require that all covered credit unions phase in the adverse effect of CECL,” NASCUS wrote. The association urged the agency to also allow credit unions “the choice of recognizing the full day-one effect of CECL immediately rather than phasing in the costs over the three-year period.”
- NCUA should consider how CECL will be incorporated into stress testing requirements after implementation: “It is our understanding NCUA has begun to address some of these issues with covered credit unions required to conduct stress testing,” NASCUS wrote. “We urge NCUA to continue these discussions, including with state regulators, to ensure the regulatory stress testing framework can incorporate CECL when appropriate.
“NASCUS, many state credit union regulators, and many state credit union system stakeholders remain concerned that the CECL methodology will be counter-productive when implemented for the credit union system,” NASCUS stated in concluding its letter. “We agree with the sentiments expressed and specific points raised by Chairman Hood in the Chairman’s April 30, 2020 letter to the FASB. We encourage NCUA to continue efforts to engage with the FASB to remediate this issue.”