Double Count Accounting Fix Advances Despite Big Bank Angst (1)

Accounting standard-setters agreed Wednesday to fix loan loss accounting rules that critics say make bank merger deals look bad on paper, despite mixed feedback on the proposed solution.

Complaints about the so-called “double count” of credit losses when banks buy or acquire healthy loans meant the board had to change existing rules even though support for the change wasn’t universal, a majority of the Financial Accounting Standards Board said.

Board members acknowledged that many banks, including JPMorgan Chase & Co. and Citigroup Inc., had reservations about the plan FASB issued for public feedback in June, as did auditors concerned about some of its technical provisions. But bankers who had actually performed mergers and had to wade through existing accounting supported the proposal, as did analysts who had to unpack the numbers to understand the true economics of big deals.

“Those who have been affected by these unintuitive outcomes are strongly supporting us moving forward,” FASB member Frederick Cannon, a former bank analyst, said.

FASB’s proposal aimed to address complaints about part of a bank accounting overhaul that went into effect in 2020, forcing banks to own up to losses on loans earlier in the credit cycle. A small—but heavily criticized—part of the new accounting rule forces financial institutions to counterintuitively record more losses on healthy loans they buy or acquire in a merger compared with loans where borrowers have missed payments or show other signs of distress. Booking potential losses on performing loans doesn’t make sense, bankers have said. Analysts have also expressed frustration that an otherwise exciting acquisition or merger looks weak because of accounting rules.

FASB’s plan would eliminate the accounting distinction between acquiring a pool of healthy loans versus loans that look shaky. As written, FASB’s major bank accounting rule—the current expected credit loss, or CECL, standard—assumes that if a bank buys distressed loans at a discount, the chance of losses is built into the purchase price. The bank therefore doesn’t have to perform a separate calculation to book losses on those loans. Purchased loans that are healthy, however, require a fresh calculation to determine future loan losses, which means booking more losses and reducing net income.

Under FASB’s plan, this onerous “double count” of credit losses would be eliminated.

Trepidation Over Proposed Fix

Regulators whose remit is ensuring the safety and soundness of the banking system have been leery of any changes to FASB’s credit loss rule.

The Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, and the National Credit Union Administration told FASB it was too soon to make such a significant change to the landmark credit loss accounting rule. The proposed change would delay recognition of losses during bank mergers, the regulators said.

JPMorgan Chase and Citigroup said the proposal would be costly and time-consuming to implement. Other banks expressed concerns that all purchased assets, including credit card portfolios, would get swept up into new rules.

Truist Financial Corp., the institution that emerged from the 2019 tie up between SunTrust Banks Inc. and BB&T Corp., backed the plan, saying it would get rid of the “uneconomic” double count of the credit mark on healthy assets. US Bancorp, which acquired MUFG Union Bank in December 2022, also supported FASB’s proposal, saying it would get rid of results that investors find “confusing and uneconomic.”

FASB will meet again to work through the proposal’s details, including any ideas on how to make the plan more palatable to critics, such as potentially scoping out acquisitions of credit card portfolios from the plan.

“I continue to support the original objective. I don’t think that the issues that have been posed to us so far are really insurmountable,” FASB member Susan Cosper said. “There’s some additional research and analysis that needs to happen.”