New CECL Rules Could Further Constrain CRE Lending
COVID-19 has further complicated an already complex adjustment to how banks have to account for potential losses on their balance sheets.
August 17, 2020 | Beth Mattson-Teig | National Real Estate Investor
Banks and other financial institutions have griped about being inundated with new rules and regulations over the past decade. But for the new Current Expected Credit Losses (CECL) accounting rules—which went into effect at the start of the year for many public filers—the timing really could not have been worse.
The new FASB accounting standards are intended to provide a bigger backstop against losses associated with bad loans. Instead of recognizing a loss on the balance sheet when it occurs, the new rules require lenders using generally accepted accounting principles (GAAP) to calculate and recognize risk of potential losses at the time of origination. In addition, the risk of credit losses on existing loans needs to be periodically reviewed and updated based on current market conditions.
Even before the pandemic hit, the expectation was that the new rules would force lenders—especially banks—to increase reserves, which would take a bite into profitability. COVID-19 has further complicated the already complex adjustment, generating an explosion of potential loan risk that is raising the amount of cash financial institutions are required to stockpile.
