The new credit losses accounting standard is not expected to have a major impact on the loan loss reserves of most large publicly listed U.S. banks, according to Moody’s Investors Service.
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Moody’s analyzed the banks' preliminary estimates in their third-quarter SEC filings and its conclusion largely reflects favorable macroeconomic conditions and the banks' current high capital adequacy.
CECL adoption is likely to cause most banks to increase their loan loss reserves and reduce capital slightly, according to Moody’s. However, under the credit agency’s solvency analysis, which considers both capital and reserves as loan-loss mitigants, banks' overall loss-absorption capacity will be essentially unchanged.
"The accounting change by itself is unlikely to change our assessment of banks' stand-alone credit strength,' says Moody's vice president Maria Mazilu in a statement Tuesday. "However, if a bank were to restore its capital ratios, or otherwise offset the impact of CECL, it would be credit positive."
However, Moody’s sees some problems with the new standard. Beyond capital, some of the negative aspects of CECL accounting, according to the report, include increased earnings volatility and decreased peer comparability, which may cause investor uncertainty and raise funding costs.