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Statement of NCUA Board Member Todd M. Harper Proposed Rule on the Transition to the CECL Methodology

July 2020
Statement of NCUA Board Member Todd M. Harper Proposed Rule on the Transition to the CECL Methodology
The Honorable Todd M. Harper at home

Board Member Harper delivers remarks during a NCUA Board meeting remotely.

As Prepared for Delivery on July 30, 2020

Thank you, Mr. Chairman. I am pleased that you have brought this matter up for consideration. Thank you also, Alison and Ariel, for preparing and presenting the proposed rule on the transition to the current expected credit losses, often referred to as CECL, accounting methodology.

Because we should mitigate the day-one adverse effects on regulatory capital that may result from the adoption of the CECL accounting methodology, I have called for action for several months on a phase-in.

This rulemaking is similar to the CECL-implementation issued by the other federal banking agencies last year and permissible under the Federal Credit Union Act. As the proposal lays out, the effects of the proposed phase-in on a federally insured credit union’s net worth calculations are consistent with section 216 of the law and closely modeled on the CECL transition provisions issued by the other banking agencies. Specifically, the proposed rule is narrowly tailored to temporarily mitigate the impacts of CECL adoption on the prompt corrective action classification of a federally insured credit union’s net worth.

Further, this proposed rule does not adjust the numeric net worth ratios under the NCUA’s system of prompt corrective action. The sole purpose of the proposed phase-in is to give federally insured credit unions some time to adjust to the new GAAP standards adopted by the Financial Accounting Standards Board in a uniform manner and without disrupting their ability to serve their members.

Taken together, estimating expected credit losses over the life of an asset under CECL, including consideration of reasonable and supportable forecasts but without applying the probable threshold that exists under the incurred loss methodology, results in earlier recognition of credit losses.

Earlier recognition of credit losses, in my view, is a good thing.

Our Office of General Counsel has also added language within the proposed rule clarifying that states may elect to impose GAAP standards on small credit unions with less than $10 million in assets that fall within their jurisdiction. This change results from an issue raised during the NCUA’s consultation with state regulators, and it is helpful to clarify the language to reflect the input of our state partners in supervision.

Alison, I do have several questions for you about the practical effect of CECL on credit unions.

Upon the implementation of CECL, what will happen to a credit union if there is a swing in retained earnings and the credit union drops more than one Prompt Corrective Action category?

Alison, I know that when we had our briefing before today’s meeting, you offered me some statistics about how many of our 5,200 federally insured credit unions would see a change in their PCA category upon the implementation of CECL and there were very few that would change. Would you remind me of those statistics?

Thank you for that explanation. It helps to assure me that there will be little exposure to the Share Insurance Fund if we finalize this proposal. Alison, what happens to the CECL accounting methodology when a credit union acquires the assets and customers of a bank through a merger?

Thank you, Alison. My next question is on a slightly different matter but on a matter I often hear from credit unions I’m visiting. What are the NCUA’s plans for examiner and credit union training on the CECL methodology?

I do believe we need to improve our education for credit unions on CECL and I know that staff is working on this matter.

Thank you, and finally, will credit unions need to hire an econometrician or consultants to implement CECL? Or is this something that the vast majority of credit unions can do on their own?

Alison, I appreciate your comprehensive responses to each of my questions. Thank you, Alison and Ariel, for the excellent work that went into this proposal.

Mr. Chairman, I have no further comments.

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