At the end of 2019, as the biggest change to bank accounting loomed, bankers took comfort in one fact: they’d at least get to overhaul how they calculate losses on loans during a stable, relatively predictable economy.
The coronavirus pandemic upends that assumption. Shuttered factories, travel disruptions, broken supply chains, and quarantined personnel all threaten to skew predictions on where loan quality is headed.
“You couldn’t have written this drama any worse,” said Stephen Masterson, CEO of SM & Co. LLC, a financial services advisory firm.
The economic upheaval strains the calculations large publicly traded banks like JP Morgan Chase & Co. and Bank of America Corp. made at the beginning of the year on how the current expected credit losses (CECL) accounting standard would affect the reserves they record to cover future losses on loans.
The result: those reserves could creep higher. And if the uncertainty continues, it could inject volatility into their earnings from quarter to quarter.
“All CECL says is, ‘think about these things when you set your reserve’,” said Financial Accounting Standards Board member Harold Schroeder. “It’s probably higher than it was a month or two ago when we weren’t planning for,basically, a global shutdown of everything.”