[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]






 
                     ASSESSING THE IMPACT OF FASB'S


                  CURRENT EXPECTED CREDIT LOSS (CECL)


                    ACCOUNTING STANDARD ON FINANCIAL


                      INSTITUTIONS AND THE ECONOMY

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           DECEMBER 11, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-123
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          
                               _________ 

                  U.S. GOVERNMENT PUBLISHING OFFICE
                   
33-798 PDF                WASHINGTON : 2018      



                           
                           
                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                     Shannon McGahn, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                 BLAINE LUETKEMEYER, Missouri, Chairman

KEITH J. ROTHFUS, Pennsylvania,      WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida              NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina     AL GREEN, Texas
ANDY BARR, Kentucky                  KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado               MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas                DENNY HECK, Washington
MIA LOVE, Utah                       GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 11, 2018............................................     1
Appendix:
    December 11, 2018............................................    39

                               WITNESSES
                       Tuesday, December 11, 2018

Blackley, Scott, Chief Financial Officer, Capital One Financial 
  Corporation....................................................     8
Nelson, Bill, Executive Vice President and Chief Economist, The 
  Bank Policy Institute..........................................     6
Stieven, Joseph A., Chief Executive Officer, Stieven Capital 
  Advisors, LP...................................................     5
Zandi, Mark, Chief Economist, Moody's Analytics..................     9

                                APPENDIX

Prepared statements:
    Blackley, Scott..............................................    40
    Nelson, Bill.................................................    54
    Stieven, Joseph A............................................   103
    Zandi, Mark..................................................   105

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Letter from the American Bankers Association to FSOC.........   122
    Statement for the record from the American Bankers 
      Association................................................   125
    Letter from the Credit Union National Association (CUNA).....   134
    Letter from the Financial Accounting Standards Board (FASB)..   136
    Rules of Procedure from the Financial Accounting Standards 
      Board (FASB)...............................................   144
    Statement from the National Association of Mutual Insurance 
      Companies (NAMIC)..........................................   151


                     ASSESSING THE IMPACT OF FASB'S



                  CURRENT EXPECTED CREDIT LOSS (CECL)



                    ACCOUNTING STANDARD ON FINANCIAL



                      INSTITUTIONS AND THE ECONOMY

                              ----------                              


                       Tuesday, December 11, 2018

                     U.S. House of Representatives,
                     Subcommittee on Financial Institutions
                                       and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:02 p.m., in 
room 2128, Rayburn House Office Building, Hon. Blaine 
Luetkemeyer [chairman of the subcommittee] presiding.
    Present: Representatives Luetkemeyer, Rothfus, Lucas, Barr, 
Tipton, Loudermilk, Kustoff, Tenney, Clay, Maloney, Meeks, 
Scott, and Heck.
    Also present: Representatives Budd, Hill, Zeldin, and 
Sherman.
    Chairman Luetkemeyer. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time. This hearing is entitled, 
``Assessing the Impact of FASB's Current Expected Credit Loss, 
or CECL, Accounting Standard on Financial Institutions and the 
Economy.''
    Before we begin today, I would like to thank the witnesses 
for appearing today. I appreciate your participation. And we 
anticipate votes around 4, so hopefully if we can get done 
before then, it will be great; if not, we will hope that you 
will be able to be held over until after we get back which 
probably wouldn't be too long. I don't think we have too long 
of a session today; maybe 45 minutes to an hour so, we will see 
how it works out. But again just to give everybody a heads up.
    I now recognize myself for 4 minutes for the purposes of 
delivering an opening statement. There has been much 
conversation over how to best calculate expected credit losses 
for financial firms. That conversation has taken place at the 
Financial Accounting Standards Board, or FASB, and financial 
institutions of all sizes across the Nation.
    It has also been discussed in the halls of Congress. 
Several months ago, I co-hosted a roundtable discussion with 
several members of the Financial Services Committee, 
regulators, and stakeholders to discuss FASB's current expected 
credit loss, or CECL, standard.
    The FASB leadership later commented to the press that the 
meeting had been contentious. That was an accurate statement. 
The meeting was contentious because this is an important issue, 
and one that could have serious implications for our economy. 
It deserves our full attention.
    The final CECL standards set to be implemented in the 
coming years represents, in my judgment, the most significant 
accounting change to the banking industry in decades. With this 
new standard, institutions will recognize the expected lifetime 
losses at the time a loan or other financial product is 
recorded.
    This rule has been done under the guise of investor 
protection. It applies to every single financial institution in 
the Nation regardless of whether they are publicly traded or 
privately held.
    If the purpose of CECL is to protect shareholders, it is my 
opinion that private firms, particularly community banks, 
should be exempt from this rule altogether.
    For publicly traded firms, FASB should amend the final rule 
so that it appropriately takes into consideration existing bank 
capital regimes which already require institutions to hold 
capital against expected losses.
    Ultimately, we need a rule and enforcement mechanism that 
reflects the realities of banking. We also need processes in 
place that offer greater clarity and collaboration.
    Since our roundtable, FASB has indicated a willingness to 
work with Congress and with stakeholders to make changes to the 
final standard. Some of the suggestions will be highlighted 
today by our panelists.
    I hope FASB's willingness is sincere, and I encourage the 
board to take into account any and all alternative proposals 
discussed.
    I also want to encourage the Federal financial regulators 
to consider the dramatic challenges that will result from 
implementation of this standard, and to have their examiners 
exercise pragmatism and sensibility as banks and credit unions 
work toward compliance.
    We have a very distinguished panel of witnesses with us 
today and we thank them for appearing. The Chair now recognizes 
the gentleman from Missouri, Mr. Clay, for an opening statement 
for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman. And in the interest of 
brevity, knowing that we will face votes sometime during this 
hearing on the floor, I am going to defer my opening statement 
to my good friend from California, Mr. Sherman, I yield to him.
    Mr. Sherman. I thank the Ranking Member both for the time 
to make an opening statement and for the opportunity to 
participate in this subcommittee. Wherever on Capitol Hill 
there is a discussion of accounting theory, I am certain to be 
there as chair or co-chair of the CPA caucus.
    FASB is a government entity. If you violate its rules, you 
go to jail. It is the most powerful government entity double 
insulated from the public. That is to say, the SEC (U.S. 
Securities and Exchange Commission), we have delegated power to 
the SEC which then delegates power to FASB.
    By comparison, the Fed is a populist organization. The Fed 
comes here to discuss their policies far more often than FASB. 
And the fact is that what FASB does is more important than well 
over half of the government entities that are subject to the 
Administrative Procedure Act.
    We need to see FASB follow or provide quantitative impact 
studies and field testing before they turn the economy on its 
head, or any sector of the economy on its head.
    Now, this is an area where this is an anomaly from an 
accounting perspective. They are going to turn to banks and say 
the day you make a loan that you think is a good loan, you have 
lost money. That is crazy. If it were true you wouldn't make 
the loan.
    But the idea that you incur a loss when you make a loan, 
you are going to make a hundred loans, hopefully in my 
district. I guarantee on a couple of them, especially if you 
loan to some people I would otherwise tell you about, you are 
going to lose money on maybe two of them. You are going to make 
money on 98 of them. You don't recognize the profit on day one. 
You shouldn't recognize the loss on day one. It is a portfolio 
of loans with profit and loss built in it. But I am told by 
FASB that it is important that you have higher reserves. That 
in the years before the economic recession that banks were not 
booking adequate reserves.
    Now, you would think it would be the bank regulators that 
would decide whether you need more reserves. And they can 
simply allocate, take a portion of your capital on the right 
side of your balance sheet and say keep that money available, 
because we could have an economic downturn. In fact, requiring 
you to have sufficient capital is their main job.
    The other way to increase your reserves is to take one of 
your assets and subtract something from it in order to force 
you to have more reserves. If you need more reserves, that 
would be a good thing. But put aside the balance sheet, because 
we have to understand that what drives public companies is the 
income statement.
    And for us to tell banks, if you loan $100 million to small 
businesses, you incur a loss when you do it right, when you 
have good underwriting standards. But if you invest in a $100 
million dollar bond portfolio, of publicly traded bonds and you 
say we are not going to hold these bonds to maturity, most 
people don't, then you can invest $100 million without 
incurring a loss.
    Every day, there is a struggle for capital between Main 
Street and Wall Street, between those who get money from banks 
by issuing a bond and those who have to come beseeching you for 
a loan. And we should not allow FASB to adopt this standard 
which biases you against Main Street and in favor of Wall 
Street.
    That being said, I am sure that if FASB goes back to the 
drawing board on this, they will figure out a way to make sure 
that there are adequate reserves without imposing something on 
you that reduces your earnings per share, because that is what 
will drive your behavior.
    And if you are told that--and I realize this all, and 
eventually, if you have been in business long enough, this can 
come out in the wash. What you did 2 years ago moves in one 
direction, what you are doing now. But anytime we turn to a 
bank and say make a good loan to a small business, that means 
you have lower earnings per share, that is a bad day. I yield 
back.
    Chairman Luetkemeyer. The gentleman's time has expired. 
Before I turn to him for opening remarks, I would like to 
recognize the distinguished gentleman from Pennsylvania, Mr. 
Rothfus, the Vice Chair of the subcommittee.
    Mr. Rothfus has been a tireless advocate for economic 
freedom and growth. He has been a valued member of this 
committee, and he will be missed. With that, the Chair now 
recognizes the Vice Chairman of the subcommittee, the gentleman 
from Pennsylvania, Mr. Rothfus for 1 minute for an opening 
statement.
    Mr. Rothfus. I want to thank the Chairman for calling 
today's hearing on potential impacts of CECL. This Congress, we 
have made significant progress, bipartisan progress right-
sizing the regulations on our financial sector.
    These reforms have strengthened our financial institutions 
and made them more responsive to consumer needs. An important 
principle supporting this effort is that we need to consider 
the cost and benefits of any major change, whether we are 
looking at new regulation or a change in GAAP (generally 
accepted accounting principles).
    With implementation looming in the distance, CECL has come 
up in many of my discussions with bankers throughout western 
Pennsylvania. Both large and small institutions are concerned 
about implementation and the potential impacts that this new 
approach may have on the way they do business.
    I look forward to hearing from today's witnesses, what 
effects they anticipate from the implementation of CECL and 
whether further study or adjustments may be necessary. With 
that, I yield back to the Chairman.
    Chairman Luetkemeyer. The gentleman yields back his time.
    Today, we welcome the testimony of Mr. Joe Stieven, Chief 
Executive Officer of Stieven Capital Advisors; Mr. Bill Nelson, 
Executive Vice President and Chief Economist for the Bank 
Policy Institute; Mr. Scott Blackley, Chief Financial Officer 
of Capital One Financial Corporation; and Mark Zandi, Chief 
Economist of Moody's Analytics.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. Without objection, each of 
your written statements will be made part of the record.
    And before we begin, we need to have a little housekeeping 
here. We have a, because of the content of the discussion 
points of this committee, we have a number of members of the 
full Financial Services Committee who are not members of the 
subcommittee who would like to be here today. In order for them 
to participate, we need to recognize them.
    Without objection, the gentleman from North Carolina, Mr. 
Budd; the gentleman from Arkansas, Mr. Hill; the gentleman from 
New York, Mr. Zeldin; and the gentleman from California, Mr. 
Sherman, are permitted to participate in today's subcommittee 
hearing. While not members of the subcommittee, they are 
members of the full Financial Services Committee and we 
appreciate their participation.
    With that, we begin the testimony. Mr. Stieven, you are 
recognized for 5 minutes. Welcome.
    OK. You need to hit the button on your microphone. And I 
would ask each of you to pull those little boxes toward you. 
They do come toward you.
    This is not the best acoustics in the world here. If you 
just act like you are going to take a bite out of the 
microphone, it works really well and we can actually hear you. 
I do appreciate that. The closer you get to the microphone, the 
better it is. OK. Mr. Stieven, you are recognized for 5 
minutes.

                   STATEMENT OF JOSEPH STIEVEN

    Mr. Stieven. Thank you. Good afternoon. My name is Joe 
Stieven, and I am honored and sincerely appreciate the 
opportunity to share my personal views and opinions on the 
scheduled topic.
    I have analyzed the financial industry and financial 
institutions for 35 years. Early in my career, I was an analyst 
examiner in banking supervision and regulation at the Federal 
Reserve Bank, St. Louis.
    From there, I went to Stifel Nicolaus for 20 years. I 
founded and was director of Financial Institutions Research. 
During my tenure, we completed over 250 transactions for 
financial institutions. Most recently, 13 years ago, I started 
my own company, an SEC-registered private investment advisory 
firm focusing on financial institutions.
    In January 2012, in addition to my CEO responsibilities, I 
was appointed by then-FASB Chairman Seidman as a member of the 
Investors Technical Advisory Committee (IAC). It was a 4-year 
non-compensated appointment. The FASB expected us to thoroughly 
analyze and discuss current and proposed accounting rules, 
including CECL.
    After a year, approximately, I was invited by the FASB 
chairman and the board to become the co-chair of the IAC. In 
April 2015, the IAC issued a comment letter on CECL. I would 
like to read to you a short excerpt from the summary paragraph 
on page two.
    ``Currently, IAC members have wide-ranging views on the 
proposed CECL model. However, a majority view the proposed 
model as needing improvements on topics listed in the body of 
this letter under points of general concern. These points 
addressed, one, process and implementation; two, lifetime 
losses accrued day one; and three, IFRS (International 
Financial Reporting Standard) convergence.''
    I have been asked to discuss the impact this new accounting 
standard will have on financial institutions, including the 
effect on the availability and affordability of credit for your 
constituents, U.S. consumers, and the burden on financial 
institutions.
    Let me get started. The burden on financial institutions, 
primarily banks, is much more than readily apparent. Instead of 
me giving you my opinion, let me give you an actual example.
    One of my seven references is David Kemper, Executive 
Chairman of Commerce Bank, a great regional bank with 150-year 
roots. Commerce never took a penny of TARP (Troubled Asset 
Relief Program). And they came through the 2007-2009 Great 
Recession in excellent shape.When the market froze up, Commerce 
was still lending to consumers.
    I know this for a fact, because I have been a customer of 
that bank for over 25 years. They came through the toughest 
period in nearly a century, and they had to go out and hire a 
third party to do their CECL modeling. This shows you the 
complexity of this model.
    I can give you other names of other great companies with 
similar experiences, like Texas-based Prosperity Bancshares. 
Again, no TARP. CEO David Zalman, if you add these 
implementation costs to the wide-ranging estimates from third-
party experts for the reserve build, it could cost $20 billion, 
$50 billion, some say $1 hundred, but don't stop there.
    What is the impact on customers and consumers, and the 
availability of credit? If a loan equals about 10 times each 
dollar of equity, the simple math amounts to about $500 
billion, a half trillion of potentially less lending.
    Let me ask you. Do you think that hurts availability? The 
answer is obvious. Will this lower long-term financing, if 
lenders have to look out lifetime, does this push people out of 
the banking industry into non-bank lenders?
    Will the rates that these other lenders, subprime 
companies, payday lenders, will their rates be more than what 
banks charge? How many billions are going to be wasted on 
unproductive modeling, as none of this modeling, none of it, 
changes the actual result?
    In my view, this model definitely will impact the 
availability of credit for consumers. Furthermore, there are 
other negative consequences that absolutely need to be 
discussed in the Q&A. Thank you. I have 4 seconds.
    [The prepared statement of Mr. Stieven can be found on page 
103 of the appendix.]
    Chairman Luetkemeyer. Well done, Mr. Stieven. We appreciate 
timeliness around here. I didn't explain the timing mechanism. 
There's a green means go; yellow means you have a minute left; 
and red means we need to call it quits.
    Mr. Nelson, you are recognized for 5 minutes. Welcome.

                    STATEMENT OF BILL NELSON

    Mr. Nelson. Thank you. Chairman, Ranking Member, and 
members of the subcommittee, thank you for the opportunity to 
testify today. I am Bill Nelson, Chief Economist of the Bank 
Policy Institute (BPI). Prior to my current role, I was Deputy 
Director of the Division of Monetary Affairs at the Federal 
Reserve Board where I worked for 23 years.
    At the Federal Reserve, I was extensively engaged in 
developing our emergency liquidity programs during the crisis, 
and helping to strengthen the liquidity and other elements of 
our regulatory framework afterward.
    I am here today to discuss BPI's research which 
demonstrates that the proposed new accounting methodology, 
current expected credit loss or CECL, is in fact pro-cyclical. 
That is, CECL will amplify swings both up and down in the 
economy.
    During the financial crisis, banks were following 
accounting rules still currently in place called the incurred 
loss methodology for credit losses. Under this approach a bank 
takes a provision, that is it recognizes credit losses which 
are then subtracted from capital when a loss is both probable 
and estimable.
    Through the crisis, domestic and international banking 
agencies were frustrated by how slowly banks were provisioning 
for losses on loans. In the aftermath of the financial crisis, 
and with a goal of reducing pro-cyclicality in the financial 
system, FASB published a new methodology, CECL.
    Under CECL, banks must provision for all losses expected 
over the entire life of the loan when they first book the loan. 
As an illustrative example, if a bank projects the loss rate on 
a 5-year home equity loan to be 2 percent per year, it will 
book an immediate loss equal to 10 percent of the loan amount 
when it makes such a loan.
    For each subsequent period, the bank would take new 
provisions, positive or negative, as it changes its economic 
outlook and receives information about the performance of the 
loan.
    It is undisputed that lending standards deteriorated in the 
years preceding the crisis. A requirement the banks take losses 
based on a more forward-looking perspective would seem likely 
to increase provisioning during the go-go years, thereby 
diminishing the enthusiasm for making bad loans. And leaving 
banks better prepared for the subsequent fallout.
    Indeed, early studies of CECL concluded it would be 
counter-cyclical as intended. However, we have all learned a 
lot about projecting loan losses over the past decade, in part 
due to stress testing. In particular, loan losses depend 
importantly on the state of the economy in addition to lending 
standards. As a result, understanding the cyclical properties 
of CECL requires determining how the economic projections banks 
will utilize, evolve over the cycle. Unfortunately, early 
studies simply assumed that banks could predict with perfect 
foresight the state of the economy. This proved to be a 
critical mistake.
    By contrast, my colleague Francisco Kovacs and I used real-
time projections of the economy combined with models of loan 
losses developed by the New York Fed to estimate what level of 
loan loss allowances CECL would have called for in the years 
before, during, and after the financial crisis.
    Because economic projections almost never anticipate 
turning points in the business cycle, economists tend to revise 
outlooks down as the economy slows and up when the economy 
picks up.
    By our estimates, CECL-based loan and lease loss allowances 
as the percent of bank loans would have risen only about one 
half percentage point in 2005 and 2006 as lending standards 
deteriorated, but 3-1/2 percentage points in 2007 and 2008 as 
the economy collapsed.
    Had CECL been in place during the financial crisis, we 
estimate that banks' capital ratios would have been 1-1/2 
percentage points lower in the third quarter of 2008. Those 
lower capital ratios would have reduced bank credit supply in 
the crisis by an additional 9 percent, significantly worsening 
the recession. These results support our conclusion that CECL 
is indeed pro-cyclical.
    CECL loan loss accounting will not only be pro-cyclical, it 
will also disproportionately affect home mortgages, student 
loans, small business loans, and loans to households with less 
than pristine credit histories.
    For example, CECL would require a bank to book an immediate 
loss of $1,500 when originating a typical $250,000 mortgage in 
good times, and a $15,000 loss when originating the same loan 
in bad times, a tenfold increase. Such a requirement would 
reduce banks' willingness to make such loans in times of 
stress.
    While FASB followed a rigorous process around the proposal, 
we believe that given our findings more economic analysis is 
required to understand better the downside risks of 
implementing this new standard and incorporating it into 
regulatory capital.
    Thank you again for the opportunity to testify and to 
present our research. I look forward to your questions.
    [The prepared statement of Mr. Nelson can be found on page 
54 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Nelson.
    Mr. Blackley, you are recognized for 5 minutes. Welcome.

                   STATEMENT OF SCOTT BLACKLEY

    Mr. Blackley. Thank you. Chairman Luetkemeyer, Ranking 
Member Clay, and members of the subcommittee, my name is Scott 
Blackley and I am the Chief Financial Officer of Capital One 
Financial Corporation.
    Capital One is a diversified bank that offers a broad array 
of financial products and services to consumers, small 
businesses, and commercial clients. I want to thank you for 
inviting me to testify before the subcommittee about the FASB's 
new accounting standard, commonly referred to as CECL.
    I applaud the FASB's desire to address the criticisms of 
the current accounting for loan losses. Unfortunately, I 
believe that CECL will create significant unintended 
consequences that will be harmful to the availability, 
accessibility, and affordability of credit for consumers and 
small businesses. During an economic downturn, this will be 
particularly felt by those in underserved segments of the 
market.
    What is it about CECL that leads us to believe these 
outcomes are likely? Today, banks book credit losses on loans 
when those loans are probable and estimable based on conditions 
that exist at that moment, including where we are in the 
economic cycle.
    We record revenue on good loans and we recognize losses on 
those that turn bad. Under CECL, companies will be required to 
recognize all future estimated losses on loans before 
recognizing any revenue.
    Let me offer an example. If a bank originates a mortgage 
loan and the borrower makes payments for 10 years before 
encountering some unfortunate financial difficulty, the bank 
will generate revenue and capital during those years before the 
loan goes bad.
    Under CECL, the bank would recognize all expected future 
loan losses when the loan is originated and before even the 
first dollar of revenue is recognized, reducing bank capital 
immediately.
    This accounting distorts the economics of lending and it 
disadvantages lending to those with less than perfect credit. 
This is because the higher the perceived risk of a loan, the 
higher the upfront loss we must book.
    It stands to reason that during a recession, banks will be 
less likely to lend when CECL requires that we reduce our 
capital for losses that could occur years into the future, and 
before we have generated even a dollar of revenue.
    Another issue is that in practice CECL will be highly pro-
cyclical. Having overseen the loan loss allowance at financial 
institutions for over a decade, I believe I have a good 
perspective to offer about what the future under CECL will look 
like.
    Prior to an economic downturn, allowances will be based on 
economic forecasts heavily influenced by the then-current 
environment. As an economic downturn evolves, forecasters will 
increasingly incorporate worsening economic assumptions which 
will drive up CECL allowances and reduce lending capacity.
    Further, I believe there will be a strong bias from 
auditors and regulators to expect banks to build allowances 
assuming economic worsening until there is evidence of economic 
improvement. This process will likely result in the peak loss 
allowance occurring after the peak of the economic worsening.
    As banks increase reserves, this naturally reduces the 
level of capital available to lend. Under CECL, banks will be 
further limited in their ability to lend during an economic 
downturn, which is damaging not only to consumers and small 
businesses but also to the economy more broadly.
    As we saw during the global financial crisis, constrained 
credit significantly amplifies the impacts of an economic 
downturn.
    In conclusion, we must ask, is it wise to go forward with 
an accounting rule that distorts the economics of lending and 
has the potential to constrain lending in an economic downturn?
    Capital levels, not allowance increases, are the 
appropriate way to address credit loss uncertainty. And under 
the robust post-crisis regulatory regimes, particularly the 
stress testing mandated by the Dodd-Frank Act, the largest 
banks are already required to hold capital for extraordinary 
levels of economic and industry challenges.
    We believe that either CECL or the capital regimes must be 
modified in order to avoid the adverse effects that CECL may 
drive on consumers, small businesses, and on our economy. Thank 
you, and I look forward to answering questions that you may 
have.
    [The prepared statement of Mr. Blackley can be found on 
page 40 of the appendix.]
    Chairman Luetkemeyer. Thank you Mr. Blackley.
    Mr. Zandi, you are recognized for 5 minutes. Welcome.

                     STATEMENT OF MARK ZANDI

    Mr. Zandi. Thank you. Chairman Luetkemeyer, Ranking Member 
Clay, members of the subcommittee, thanks for the opportunity 
to be here today. I am the Chief Economist of Moody's 
Analytics. These are my views, not those of Moody's.
    I should also point out that I am on the board of directors 
of MGIC, a national mortgage lender insurer, and also the Lead 
Director of the Reinvestment Fund, one of the Nation's largest 
community development financial institutions. We invest in 
underserved communities across the country.
    We do a lot of work with the banking industry here in the 
U.S. and overseas on CECL, stress testing, and have been very 
involved in the IFRS 9 process overseas which is the analog 
overseas to CECL implementation here. And that is already 
underway overseas.
    I would like to make three points in my remarks. Point No. 
1 is I think CECL adoption will lead to a stronger, safer 
financial system and economy. There are a number of benefits to 
CECL.
    Most importantly, it will be less pro-cyclical than the 
current incurred loss accounting system. Under an incurred loss 
system, the loan loss provisioning is highly pro-cyclical. We 
could see that clearly evident in the last recession, the Great 
Recession, if you go back to the end of the housing bubble in 
late 2006 when unemployment was low and house prices were 
rising very rapidly, loan loss provisions were also very low, 
equal to about 1 percent of outstanding assets.
    By the end of 2009, coming out of the Great Recession, the 
loan loss allowance was about a little over 3 percent of 
outstanding assets. A very substantive increase in loan loss 
provisioning during the period which exacerbated the decline in 
corporate bank earnings, profitability, obviously capital, and 
contributed to the severity of the economic downturn, and 
contributed to the credit crunch that soon followed.
    Take CECL, if it were in place 10 years ago prior to the 
Great Recession, during the boom times, during the housing 
bubble when lending standards, unemployment was very low, house 
prices were very high, lending standards were very poor and 
egregious. CECL would have required the banking system to 
reserve at a much higher level than they actually did, which 
would have hurt earnings, profitability, capital, and incented 
the banking system to be less aggressive in extending credit 
during that bubble period.
    Now, I don't think CECL would have prevented a bubble. 
There were a lot of other dynamics in that period, but it 
certainly would have mitigated the bubble and made the 
subsequent economic crash much less serious.
    Not that CECL is counter-cyclical, it is not. But it is 
meaningfully less pro-cyclical than the current incurred loss 
accounting system. And you can read my written testimony to 
give a very transparent example of how this works for Freddie 
Mac's mortgage book based on their loan portfolio.
    Point No. 2, having said all of that, I think there are 
things we can do to make this better. There are some reasonable 
concerns about CECL and its adoption. I will mention two very 
quickly.
    First, I think there should be capital relief. The purpose 
of CECL is not to cause the banking system to be higher, more 
highly capitalized. It is an open question whether it will 
result in more capital.
    But if it does then the prudential regulators should work 
to address that, particularly for long duration assets like a 
mortgage loan or for loans to borrowers of lower credit 
quality. We don't want the banking system to have to hold more 
capital against those types of loans in a troubled period. 
Capital relief is essential.
    And two, I do think there is a good proposal on the table 
to allow banks to take the first year of the life of the loan 
loss as a charge in loan losses and put the rest of the loan 
losses, expected loan losses over the life of loan in other 
OCI, other income.
    And I think that would go a long way to addressing some of 
the concerns that the banking system has. We can talk about 
some others. I have some other ideas, but I think those two 
proposals are pretty good ones and would go a long way to 
addressing some of the concerns.
    Finally, third point, I will point out that we are not 
leading the way on this accounting change. The rest of the 
world is, Europe, Canada, the Middle East, many parts of Asia 
have already implemented this.
    And it has really been very graceful, not, much ado about 
nothing. There are differences obviously between IFRS 9 
overseas and CECL here. But they are pretty minor and don't 
change the message that at the end of the day, despite all the 
hand wringing overseas about how this would hurt the system and 
lead to significant problems, it has not. It has been a very 
graceful implementation.
    And I think the same will happen here in the United States 
when CECL is adopted under current regulations in 2020. Thank 
you. I appreciate the opportunity.
    [The prepared statement of Mr. Zandi can be found on page 
105 of the appendix.]
    Chairman Luetkemeyer. The gentleman's time has expired. One 
other housekeeping here, we want to enter into the record some 
information here. Without objection, I move to include in the 
record an April 16, 2015 letter from the FASB Investor Advisory 
Committee to FASB's technical director and the FASB rules of 
procedure dated through December 11, 2013. No objection.
    I also move to include into the record statements from the 
American Bankers Association, National Association of Regional 
Insurance Companies, and the National Credit Union Association. 
Without objection.
    With that, I will recognize myself for 5 minutes and will 
begin the questioning. Mr. Stieven, your business is to invest 
in banks. In my discussion, the roundtable with FASB, the 
gentleman there indicated that the reason for this proposal was 
because he wanted more transparency in the bank's balance 
sheets to make it easier for investors to be able to see 
problems or be able to better analyze the sheets to be able to 
do a better job of making sure they wanted to invest in these 
different banks or not.
    So I have two questions for you. No. 1, will this work? 
Will this be helpful to you? And No. 2, when you are talking 
about banks, we have roughly over 5,200 banks and there are 
probably 5,000 privately owned. That doesn't apply, to me it 
wouldn't apply to those banks. Why would this accounting system 
be necessary for those who are privately held? Can you answer 
those two questions, please?
    Mr. Stieven. On your first question, will it work? The 
truth of the matter is that with the health of our United 
States banking industry, we could even take a bad model getting 
thrown at us. We can.
    And if I look at Congress right now, you are sitting next 
to Mr. Clay, a Democrat. Accounting should not be political. It 
should be neutral. And if you look at the rules of procedure in 
the FASB, it says that. So my point is, you guys in Congress 
did something very good 5, 6, 7, 8 years ago. If you look at 
Dodd-Frank, you did some very good things; stress testing, 
capital formation. Excellent. You did it. You made the tackle 
to use a football term.
    But now 5 years later somebody is going to jump on the 
pile. Will it work? No, it won't. But then you start asking 
about the 5,200 banks. This is a huge burden. I gave you seven 
references. And these references are not to be nice to me. 
These are references for people who are experts.
    And I will tell you when David Kemper at Commerce 
Bancshares has to go out and hire a third party because they 
can't do CECL alone, I think that should tell you about the 
complexity. How are these small community banks going to do it? 
They can't.
    Chairman Luetkemeyer. I have some follow up questions. 
Thank you, Mr. Stieven. Along the same line, you were a member 
of the advisory task force, Investors Advisory Committee. Is 
that correct?
    Mr. Stieven. Four years, sir, non-compensated.
    Chairman Luetkemeyer. Four years, OK. And going through 
their principles which were made up of rules of procedure here, 
FASB's own rules, I have some concerns about this because, 
according to the other information, the dissenting opinion 
letter that was sent with that, there apparently was very 
little or no cost-benefit analysis done to this.
    Is that correct? Which is supposed to be in the rules here, 
I have underlined that this is part of their rules process. Was 
that done?
    Mr. Stieven. I have never seen a cost-benefit analysis. I 
would hope that you people in Congress have, but I have never 
seen it. And we have asked for it too.
    Chairman Luetkemeyer. So they didn't fulfill their--that is 
one point. They didn't fulfill with regards to their actual 
duty according to their own rules. Some of the other things 
here, it is very questionable in my mind that they have 
actually fulfilled these as well. But I guess my question is to 
you, because the rule was never done according their own rules, 
if I were sitting here and they were trying to ram these down 
my throat, would I have a legal recourse against these folks 
for rules that were improperly done?
    Mr. Stieven. I am not an attorney.
    Chairman Luetkemeyer. OK.
    Mr. Stieven. All I could tell you is I was at the IAC and 
you saw the comment letter we wrote. You have heard me read 
this paragraph. A lot of people have said to me, Joe, that is a 
pretty harsh statement when you are sort of part of the FASB.
    Chairman Luetkemeyer. I have one more quick question. 
Anybody on the committee can answer this question. If a bank, 
credit union, whatever, makes the loan on a home mortgage, they 
reserve the money and then they sell that to a secondary 
market. What happens?
    No. 1, the reserves that they booked, do you unbook those? 
Does it go with the loan? Now, and then as the secondary 
market, if it goes to Fannie and Freddie, do they have to book 
a reserve on the loan? Because according to Mr. Schroeder who 
was at the FASB meeting, he said Fannie and Freddie also have 
to book these losses.
    Anybody want to comment?
    Mr. Blackley. I will comment on that. As the loan is sold, 
it would come off your balance sheet and you would release the 
related reserve, the allowance associated with that loan. All 
that would come off and you would record that sale at the fair 
value that you sold it at. The buyer would put that loan on 
their books and record their own estimate of allowance.
    And one of the things that I think is interesting here is 
that the buyer and the seller could have completely different 
allowances when that loan comes on their books based on 
different views of the forward economy. But you do have it 
correct in terms of the way that would function.
    Chairman Luetkemeyer. OK. So with Fannie and Freddie, they 
are already broke. They are going to have to figure out how to 
reserve for those loans. Is that correct?
    Mr. Blackley. That is correct.
    Chairman Luetkemeyer. Holy smokes. OK.
    Mr. Zandi. So under the rules, this is a 3-year phase in. 
And if you do the arithmetic, they will have to reserve more. 
But it will not require them to go back.
    Chairman Luetkemeyer. So basically, in order to reserve for 
a Freddie and Fannie alone, those folks are going--so whoever 
has that loan with--that is sitting in their portfolio, they 
are going to have more charge. They are going to cost more for 
those loans because somebody is going to have to reserve for 
them. So they are just going to get passed on to the consumers 
of that.
    Mr. Zandi. If the asset is on your balance sheet, you have 
to reserve for it. Right? This is a question of how much--
    Chairman Luetkemeyer. Freddie and Fannie have to reserve 
for it. If HUD has to do this, they are going to charge more.
    Mr. Zandi. No, not necessarily. If you do the arithmetic on 
this, they should not have to charge more. No.
    Chairman Luetkemeyer. They don't have to reserve for loans? 
Home loans?
    Mr. Zandi. They have to reserve for loans. But if you do 
the--this is the difference. The difference is upfront 
reserving less the present value of the stream of future 
reserving, less the interest or return on the increased loan 
loss reserves you are holding--
    Chairman Luetkemeyer. End of the day, somebody is going to 
have to reserve more for that loan. That is the only way this 
is going to work.
    Mr. Zandi. It should not raise the cost in the system. It 
should not raise the cost for that loan. It should not.
    Chairman Luetkemeyer. My time is up. With that, we go to 
the gentleman from Missouri. Mr. Clay is recognized for 5 
minutes.
    Mr. Clay. Thank you, Mr. Chairman. Let me also take this 
time and thank you for your leadership of the subcommittee. It 
has certainly been a pleasure for this term. Thanks.
    Chairman Luetkemeyer. Thank you.
    Mr. Clay. Let me put or pose a question to the entire 
panel. And it comes from a statement from Randal Quarles, 
Federal Reserve Vice Chair for Supervision who testified before 
this committee a few weeks ago in response to a question about 
CECL. He seemed to suggest that the regulators are providing 
banks with ample time to transition to the new accounting 
standards so that they can closely monitor it. And that its 
impact on stress testing will be neutral.
    Vice Chairman Quarles said, and I quote, ``I am always in 
favor of measures that make more transparent the position of 
any financial institution.'' But I do agree with you that the 
implications of CECL are not currently deeply understood, and 
we need to have time to understand them. So we have proposed a 
phased-in implementation of CECL and how that affects and how 
that works with our regulatory capital regime.
    And we think that that will give us time to see how it's 
working in operation before it gets plugged into the regulatory 
capital regime. Allow us to see whether there are any changes. 
I don't know that there are. For firms that are affected by the 
stress tests, CECL could actually be a wash because to the 
extent that it means a larger reserve at the outset of the 
period of stress, then you will chew through that reserve 
before you chew through other things in the stress test. And it 
can be a one-to-one offset.
    I will start with Dr. Zandi. Do you agree with Mr. Quarles' 
assessment including that CECL may end up being a wash in terms 
of the impact on bank stress test results?
    Mr. Zandi. I do. He is bringing up a good point that CECL 
will conflate with the stress testing process. And the question 
is how will the Federal Reserve implement the stress testing 
process under CECL? And that has not been determined yet. In 
fact that is why the Fed has allowed banks to not have to do 
this for another year or so as they figure this out.
    But under reasonable assumptions about how the Fed is going 
to do this, I would be surprised if at the end of the day this 
is going to result in any significant change in the stress 
testing process, the results and ultimately what matters most, 
the amount of capital that the system has to hold.
    Mr. Clay. OK. How about Mr. Blackley? Do you have an 
opinion on it?
    Mr. Blackley. The first comment that I would make is that I 
believe that CECL actually creates a double count in the amount 
of capital you have to hold. Today I have capital that is based 
on an incurred loss model. In the future, if I have to increase 
my reserves under CECL and I don't get to reduce my capital, 
haven't I increased the total amount of capital that the bank 
has?
    That is going to be a cost that is eventually going to get 
passed on to the consumer through higher interest rates.
    Mr. Clay. And has that issue been raised with FASB?
    Mr. Blackley. We have raised this issue. I believe that it 
is one of the issues that the industry has brought forward to 
the Fed and to others.
    Mr. Clay. OK.
    Mr. Blackley. The second thing I would say is that in 
stress testing, the way the stress test works, you are trying 
to look at a situation where you have an economic shock that 
happens very quickly. Most of the worsening in the economy in 
that hypothetical stress happens almost immediately in the 
test.
    I have an accounting rule that says as soon as something 
goes--I have a loan that is going bad. I need to recognize the 
lifetime losses from a turn in the economy. I don't understand 
how you are not going to pull forward all the losses to the 
beginning of the stress test and cause the bank to ultimately 
have to hold more capital. So I am interested to hear how the 
Fed may solve that problem as well.
    Mr. Clay. Thank you. Mr. Nelson, any comment on the stress 
tests and whether it is a wash?
    Mr. Nelson. Yes. Thank you, sir. I would point out that the 
Fed's proposal, while it does involve a delay and a gradual 
implementation, it doesn't suggest that over that course of 
time there is going to be any adjustment to the standard. As a 
consequence, the problems that we have discussed including the 
severe pro-cyclicality and negative implications for lending to 
less than pristine households and small businesses will all 
still be there when it comes to the fore.
    With regard to the stress tests, as Mr. Blackley just 
noted, the stress tests involve projecting how banks would 
perform under a very severe economic recession. And of course, 
given the design of CECL, which depends, loan loss reserves 
depend upon economic projections, that is going to have a big 
impact. We estimate that the impact would in fact be an 
additional $500 billion in reserves going from a baseline to 
the worsening. And that is going to have an effect.
    Mr. Clay. Mr. Chairman, can I ask Mr. Stieven to weigh in?
    Chairman Luetkemeyer. Absolutely.
    Mr. Clay. Mr. Stieven?
    Mr. Stieven. I don't want to intentionally disagree with 
one of my panelists, but I have to. But my experiences are 
totally different. I was a bank examiner. I was there. When 
stuff hits the fan, banks have to talk to their examiners. They 
have to talk to their auditors. And when stuff hits the fan, 
things go bad, there is a race to think the worst.
    And I am going to give Mr. Clay an example, because you 
still look like you are in great shape. We had a great pitcher 
in St. Louis, Bob Gibson. We know what he could do at 60 feet. 
But CECL wants to go out a long way, lifetime.
    Let's put Mr. Gibson in centerfield. How good will his 
baseball skill be then? This is a different model.
    Mr. Clay. What an analogy. Thank you.
    Chairman Luetkemeyer. We just got Goldschmidt over the 
weekend. We are going to be great next year. Mr. Clay and I, we 
talk baseball all the time here. Mr. Clay's time has expired. 
With that, we go to Mr. Rothfus, the gentleman from 
Pennsylvania, Vice Chairman of the committee. He is recognized 
for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman. Mr. Nelson, some 
stakeholders have raised concerns that CECL's requirements will 
adversely impact the availability and price of credit and have 
a large impact on longer term products like mortgages, small 
business loans, and student loans. Do you share this concern?
    Mr. Nelson. Yes, sir. Absolutely.
    Mr. Rothfus. Do you believe that these impacts may be more 
pronounced for smaller institutions that are more heavily 
engaged in mortgage lending?
    Mr. Nelson. Yes, sir.
    Mr. Rothfus. Mr. Stieven, it appears that the changes 
required by CECL would require firms to conduct significantly 
more modeling and analysis than they do today. How costly would 
it be for banks to adjust to and operate under CECL? Can we 
quantify some of those costs?
    Mr. Stieven. Again, the estimates that are out there, no 
one knows. I have quotes from Jamie Dimon at JPMorgan just 
talking about it. And the complexities of this model, no one 
even has the answers yet.
    Mr. Rothfus. You have talked about--
    Mr. Stieven. Talking about implementing this next year. 
Even for community banks, nobody has these estimates done.
    Mr. Rothfus. Yes, you testified about Commerce Bank having 
to engage third parties to do this type of work. And you are 
looking at a local community bank. This just hasn't been 
quantified what the cost is going to be for them.
    Mr. Stieven. If I had to give a guess, and this is just a 
guess, it's in the billions. I don't know the number. Nobody 
does. And that is one of the things. There is supposed to be 
some type of a cost-benefit analysis I have never seen, and we 
have asked for it.
    Mr. Rothfus. Let's talk about the consumers. I think Mr. 
Blackley talked about--he believes the cost of this is going be 
passed along in the form of higher interest rates. Do you see 
that happening too, Mr. Stieven?
    Mr. Stieven. Absolutely, as we all know, things roll 
downhill. If costs increase, in some way shape or form, they 
get passed along to the United States consumer. So it's 
absolute.
    Mr. Rothfus. What about, Mr. Blackley? How is that going to 
impact how these community institutions are operating? What do 
you see coming down the pike in terms of product offerings, and 
what they are going to be able to do to meet the demands of the 
consumers that are out there?
    Mr. Blackley. I think that CECL is certainly going to put 
us in a situation where we won't be able to lend in all 
different economies, in good times and bad. We want to make 
sure that we can serve all markets. And our concern is that 
CECL, because of its front-loaded nature and its breaking of 
the economic earnings cycle, is going to put us in a situation 
in the middle of a downturn where we are not going to be able 
to lend to underserved communities and to folks that are non-
prime credit.
    It is just going to be harder when you are trying to 
husband your capital to then go forward and lend when you have 
to take that loss day one before you have recognized any 
revenue.
    Mr. Rothfus. This sounds a little bit like deja vu. As I 
recall, a report that Steve Strong did from Goldman Sachs 
talking about the two-speed economy that we saw going over the 
last 10 years where he looked at the financial regulation 
generally, that was coming out of this town having an impact 
greater on those smaller financial institutions.
    The big folks were able to find those third parties that 
could help out. They could retain the lawyers. They could 
retain the consultants, the accountants to navigate the 
complexity that was coming down the pike, but not so for the 
smaller institutions. And we saw the concentration and loss of 
our community finance institutions one a day even.
    Is this--are we looking--we made some great progress with 
S. 2155 providing meaningful relief to our community financial 
institutions. Do you see this taking one step back again? I 
would ask Mr. Stieven that.
    Mr. Stieven. I think S. 2155 was absolutely a step in the 
correct direction. If you look at Dodd-Frank, even Barney Frank 
of Dodd-Frank has said, it's gone too far. We have to be 
reasonable. Paul Volcker of the Volcker Rule has said, wait a 
second, we have gone too far. We have to be reasonable.
    So I want to again compliment Congressman Clay, Congressman 
Luetkemeyer, if you look at the changes in the banking industry 
over the last 10 years, the most important was tightening 
capital standards. And, the foundation of capital is tangible 
common equity. That is the foundation of all capital. If you 
look at the numbers in this industry, I could throw numbers out 
that would probably amaze 99 percent of the people in this 
room.
    Citicorp's tangible common equity in 2008 was 1.56 percent. 
Does anybody have a clue what it is today? Eight percent. It's 
5 times what it was 10 years ago. Bank of America has doubled. 
My point is you did a great job. CECL is too complex. It is 
going to hurt your community banks.
    Chairman Luetkemeyer. The gentleman's time has expired. Now 
we go with the gentleman from New York, Mr. Meeks. He is 
recognized for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman. Mr. Stieven, my 
neighbor here said that Mr. Gibson, he knows someone that could 
hit him from 60 feet away. He said his brother-in-law could 
handle him a little bit well. His brother-in-law happens to be 
Hank Aaron.
    Mr. Stieven. Another Hall-of-Famer.
    Mr. Meeks. Let me ask--I am listening. And it is really 
interesting to me. And I will start by probably asking everyone 
on the panel. I will start with Mr. Zandi. I understand the 
potential investor because I understand that this accounting 
scheme was for the investor. So they would understand the value 
of a financial institution.
    So I get it from an investor side. However, considering the 
reforms that Mr. Stieven was talking about, whether it is 
capital standards or stress testing, etcetera, that we may do 
in Dodd-Frank. I am trying to understand why is CECL necessary 
from a safety and soundness perspective? Which is what I am 
doing, why is CECL necessary?
    Mr. Zandi. Remember back to the period prior to the 
financial crisis, Great Recession and during the financial 
crisis and Great Recession. Prior, we had a bubble. Very 
egregious mortgage lending, very poor lending in the commercial 
real estate sectors, commercial and industrial lending. There 
was lots of credit going everywhere under very low underwriting 
standards.
    That was the bubble that set the stage for the financial 
crisis that caused the financial system to effectively collapse 
without support from the Federal Government. CECL--and one of 
the reasons for that dynamic--and there are many reasons. 
Capital was clearly one of them. But one of the reasons for 
that was the loan loss accounting system that we had in place, 
incurred loss.
    Under incurred loss, the current system, you only book the 
loss when you take it. But in these boom times when things are 
great, there are no losses. You could go to San Diego in 2006. 
There wasn't a single default on a mortgage because things were 
rip-roaring. But it was all fake. It was all false. It was all 
a bubble.
    But under CECL, because you were extending this credit to 
bad credits, people that were lying about income, lying about 
their--you would have to reserve a lot more. And if you reserve 
a lot more, you would make less loans.
    Mr. Meeks. That's just the--
    Mr. Zandi. So the problem is safety and soundness.
    Mr. Meeks. Didn't mean to cut you off. But that was the 
problem in my estimation. The problem was we had no-doc loans 
and some of the exotic mortgages.
    Mr. Zandi. But, why?
    Mr. Meeks. That was there so that they could package them. 
Maybe the folks knew that was the fraud there and that they 
would package them and they would sell them. But they knew in 
the beginning because they never checked the documentation that 
they may be bad loans.
    Mr. Zandi. Congressman, if I were a lender, I made that 
loan no-doc and I knew that that had a higher probability of 
default because it is no-doc, I would have to book a higher 
loan loss reserve under CECL. And if I have to do that, I am 
less likely to make that loan. That is--
    Mr. Meeks. But what my question is--and I just want to ask 
because I am concerned. I agree with Mr. Stieven that what we 
tried to do in Dodd-Frank was to fix that so that they wouldn't 
do that again, so that wouldn't happen. That was the sole 
purpose of Dodd-Frank to make sure that we got it right so this 
couldn't happen again.
    And from what I understand with reference to CECL, it was 
or it is primarily for an investor to do some value, but here's 
what my concern is. My concern is it has a reversed effect. I 
think a couple of members have said it. I don't want people 
going out not having access because that is what happens. I 
don't want them to go out, not having access to capital, into 
loans or feeling that they have to go to payday lenders or 
anything else where they have to pay some more money.
    And especially, I know that the former Fed Chair Ben 
Bernanke identified the concept he called financial 
accelerator. And it's with the idea that recessions tend to 
disrupt the flow of credit, which makes the downturns worse. 
People, they don't have access to it.
    Folks in the community like mine have no alternative. They 
have no access to credit at all. They go to these payday 
lenders and they pay all this money.
    Mr. Zandi. Totally right. But what you want is, you want 
the lenders to provide credit through the business cycle in 
good times and bad, and if they don't lend to poor credits, 
very bad credits, no-doc, no down payment in the bad times it 
is much more likely that in good times they are much more 
likely to have the resources and the ability to lend more in 
the bad times.
    That is the principle behind CECL.
    Mr. Meeks. But I am also asking particularly small-sized 
banks that have to pay more money for these regulations, why 
they are closing up in my district now. And then my folks don't 
have access to banks. And that means that I am actually causing 
another problem or a bigger problem for the folks that I 
represent.
    And I don't want them to have to go to payday lenders. And 
if I am closing the opportunities for them to go to banks 
because I am making, especially small banks, I am making it 
more difficult for them and more costly for them because it is 
still a bank. I am a capitalist. I know they are not doing it 
to give away money. They want to make some money. But I want it 
to be reasonable. Whereas the payday lenders are not 
reasonable. I understand I am over time. I yield back.
    Chairman Luetkemeyer. I love your venting, gentleman. Thank 
you very much. With that we go to the gentleman from Oklahoma, 
Mr. Lucas. He is recognized for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman. Mr. Nelson, I find the 
dissenting FASB votes to raise some very troubling prospects 
regarding CECL. For example, those members noted under the new 
method, a growing portfolio of loans will have a negative 
effect on profitability. And that seems to reinforce the old 
country adage: The people who can borrow money, don't need 
money.
    And when you reduce the profitability, you take away the 
incentive to engage in the market. Now because of the 
requirement to record, of course, full lifetime expected 
losses, they also believe that the CECL method will have 
unintended implications for the willingness of lenders to lend 
under certain circumstances and to certain kinds of borrowers. 
I will acknowledge to you in my district, I represent a goodly 
number of both agricultural producers and energy producers.
    And for the sake of discussion right now, I would like to 
focus on the ag side of the equation. Given those statements 
above, I am concerned that farmers in a rough farm economy--and 
we are into that right now, might have their credit dry up 
under CECL. Can you elaborate when and what some of the 
unintended consequences might be in this regard?
    Mr. Nelson. Yes, I think you have very good reason to be 
concerned. What we found is that because of the disparate way 
that CECL reflect--accounts for expected losses versus expected 
income, it gives banks a strong disincentive to lend to and to 
make loans that have higher expected loss rates or loans with 
longer terms. And that would include agricultural loans and 
they would have to book a significant loss right up front when 
making those loans. And that amount would go up when times 
appeared to be worse.
    Mr. Lucas. Mr. Nelson, sticking with you, FASB recently 
signaled support for an amendment to CECL. That would require 
financial institutions to break charge offs and recoveries out 
by vintage year. I would imagine that any entity who buys debt, 
be it a bank, otherwise would probably need to radically change 
their current reporting practices if this amendment passes. Can 
you discuss how such an amendment would impact those entities?
    Mr. Nelson. I am sorry, sir. Could you repeat what the 
entity--amendment was again?
    Mr. Lucas. FASB recently signaled support for an amendment 
to CECL that would require financial institutions to break 
charge offs and recoveries out by vintage year. I would imagine 
that any entity who buys debt, be it a bank or otherwise, would 
probably need to radically change their current reporting 
practices if this amendment passes. Could you touch on that?
    Mr. Nelson. Yes. Certainly. So currently, charge offs and 
recoveries are recorded on the loan level basis. So being 
required to record those amounts at the loan vintage basis 
would require significantly more work on the part of the banks.
    Mr. Lucas. One last question, Mr. Chairman. Mr. Blackley, 
should there be a cost-benefit analysis done before agreeing to 
such an amendment?
    Mr. Blackley. I think that starting with the cost-benefit 
analysis is probably the first thing we need to do. I believe 
that we also need to then either eliminate CECL or, modify how 
it works. Capital One and 20 other banks have provided a 
proposal to the FASB that we believe would eliminate a number 
of the problems that we have discussed today, including the 
pro-cyclicality in the upfront cost of lending. If we are not 
able to change the accounting standard, then we are going to 
need to do something to modify the capital frameworks to allow 
for us to not have to hold more upfront capital.
    I believe that a lot of the work that Congress has already 
done after the financial crisis with Dodd-Frank and the stress 
testing regime and other capital standards have broadly already 
dealt with all of the problems that CECL was initially intended 
to deal with. So at this point, my view would be that the best 
course of action would be to just eliminate CECL.
    Mr. Lucas. Well stated, Mr. Blackley, with that, I yield 
back, Mr. Chairman.
    Chairman Luetkemeyer. The gentleman yields back his time. 
Then we go to the gentleman from Georgia. Mr. Scott is 
recognized for 5 minutes.
    Mr. Scott. Thank you. Thank you very much, Chairman and let 
me congratulate you on winning your re-election, good to have 
you back with us, my bipartisan partner. Good to have you. It 
is an honor.
    Chairman Luetkemeyer. Good to be with you, and I saw many 
of the battles between Mr. Aaron and Mr. Gibson, they were good 
ones.
    Mr. Scott. Oh yes. The Cardinals and the Braves, can't do 
better than that. OK, what I would like to zero in on is this 
CECL and how it addresses comparability between different 
financial institutions. I think that is the core of the 
argument here we have today. And the reason I bring that up is 
because we worked hard on Dodd-Frank, I was a part of that, and 
we worked hard to reduce the complexity and increase the 
comparability between banks. We have an extraordinary banking 
system.
    But it is extremely diverse, there are so many different 
institutions. Now, as I understand it, the CECL accounting 
method does not specify a single method for measuring credit 
loss, but allows any reasonable approach that meets GAAP 
accounting standards, is that correct, Mr. Zandi, you are 
shaking your head.
    Mr. Zandi. That is correct, yes.
    Mr. Scott. All right, I want to make sure I am right. Now, 
let me go to you Mr. Blackley, in your written testimony you 
stated, and I quote, ``as institutions may make different 
judgments about the future performances of their portfolios, 
readers of financial statements will be forced to reconcile the 
differences to fully understand the comparability of financial 
results,'' is what you said, correct?
    Now, I want you to elaborate on the impact that this has on 
the ability to compare the health of banks, the great diversity 
of them, small, large, regional, you name it, across the 
industry and whether these different models could impact the 
costs that consumers might see for different credit reports 
like mortgages and small business loans, that is the core of 
it. That particularly in areas that are already experiencing 
less bank competition, could you address that?
    Mr. Blackley. Certainly, thank you. The points on 
comparability, I believe, are very important. As the CFO for 
the company, I spend a lot of time with our investor base and 
one of the core concerns that they have brought forward to me 
is we don't know how we are going to compare two different 
banks.
    There was recently an article in the Wall Street Journal 
that talked about, as Mr. Zandi spoke about in the 
international banking community, there has already been an 
accounting standard that I would call CECL-light that has gone 
into effect and the Wall Street Journal was commenting on how 
banks in the UK had already started recording allowances that 
varied from one bank to another, and no one could really 
explain why those differences were occurring.
    So I do think there is a risk when you have to rely on that 
economic forecast, I have two great economists sitting here, 
they both have different views of where the economy is going to 
go. Just imagine they are different banks, they are going to 
have different allowances. So I do believe that it is going to 
create differences and opinion about--and comparability issues 
between banks.
    Mr. Scott. Yes, let me--
    Mr. Zandi. Can I point out, Congressman?
    Mr. Scott. Yes.
    Mr. Zandi. This I view as a feature not a bug. This goes to 
allowing smaller banks and institutions the flexibility they 
need to address the CECL standard without requiring all the big 
changes that a large institution like Capital One would want to 
implement.
    Mr. Scott. And let me just say this right quick, I am also 
the chairman of the subcommittee that deals with swaps, 
derivatives, the whole cross border situation and Mr. Zandi, 
you bagin to allude to it in terms of the European models and 
all of that. Where do we stand now in terms of our own 
financial system, in terms of what we have here and then when 
you expand, all these companies that have direct and indirect 
impacts overseas?
    So right now, we have these two dynamics with the largest 
sections of the European economy in Great Britain with their 
problem with Brexit and the exit from the European Union, and 
France which I am really worried about their situation. Could 
you tell us in your estimation, what impact what is happening 
now on the European continent will have on our financial 
banking system?
    Mr. Zandi. Let me say I think our banking system is rock 
solid. I think because of Dodd-Frank, because of many of the 
other changes that have been made since the Great Recession 
including, I would hope, the adoption of CECL at some point, 
means that the U.S. banking system can weather any storm. We 
have heard the capitalization levels are measurably higher, 
liquidity levels are measurably better, risk management in 
place, measurably better.
    We are in a much better place today. So I think we can 
weather many storms, Brexit storm, what is going on in France, 
but it doesn't mean we should stop and I do think CECL would 
put our system on even sounder ground if we went down the path.
    Sure, there are changes we should make to make it work 
better and address the reasonable concerns that you are hearing 
expressed today, but at the end of the day, if we want 
comparability with the rest of the world, we should adopt 
something similar to CECL.
    Mr. Scott. Right. Mr. Stieven?
    Mr. Stieven. I was at the FASB on the ITAC when we 
discussed IFRS 9. IFRS 9 and CECL are not the same. In fact, in 
many of my discussions with people inside and outside of FASB, 
the IFRS 9 model is only sort of close to our current model.
    The United States banking system has the toughest 
standards. You look at our U.S. banks compared to the other 
international banks, we are much stronger.
    Mr. Scott. Yes. Thank you, Mr. Chairman.
    Chairman Luetkemeyer. The gentleman's time has expired. 
With that, we go to the gentleman from Colorado. Mr. Tipton is 
recognized for 5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. I appreciate the panel 
taking the time to be able to be here today. One of my primary 
concerns happens to be our local community banks. It is pretty 
interesting, economics simply don't work if you can't get a 
loan. You have to be able to get out into the community, be 
able to borrow the money. And we have had real concern 
expressed from our community banks in Colorado, the areas that 
I represent, about some of the new requirements that are coming 
in.
    Mr. Stieven, would you maybe speak, is this going to 
actually--I think Mr. Zandi had mentioned, it is going to give 
the community banks more flexibility under these new 
regulations. Would you concur with that? Do you have a 
different opinion?
    Mr. Stieven. Absolutely not, I don't believe so. This model 
is so complex. And my perfect example was Commerce, which is a 
regional bank. They can't figure it out, and they are one of 
the safest banks in the country. Explain to me how just a good 
community bank is going to figure it out? That is your answer.
    It is not even me giving you my opinion. It is a fact.
    Mr. Tipton. Yes. Mr. Nelson, maybe you would like to weigh 
in on this as well?
    Mr. Nelson. Yes, I would be happy to. As I mentioned, our 
research has concluded that CECL is going to be particularly 
difficult for banks that focus on small business lending, 
mortgage lending, lending to households with perhaps not 
perfect credit, student lending, precisely the kind of business 
models that smaller banks specialize in.
    There are current industry estimates, not our estimates 
right now that say that if you are a bank that focuses on 
corporate lending, right now, you wouldn't see your capital 
reduced very much by the implementation of CECL, perhaps half a 
percentage point, but if you are a retail bank, a bank that 
focuses on retail customers and small businesses, your capital 
could be reduced by as much as 2 percentage points.
    Mr. Tipton. Thank you. Mr. Chairman, one of the issues we 
have really had in Colorado, we have had a tale of two 
economies where a lot of our urban areas have done very well, a 
lot of our rural economies have continued to struggle and Mr. 
Blackley, would you see perhaps some of this over-regulation 
potentially on some of the small community banks, could this 
create a downward trend in economic activity? Or is this 
something that is going to stimulate economic activity?
    Mr. Blackley. Could you restate the question? I am sorry I 
missed the front-end of that.
    Mr. Tipton. You bet. It's a tale of two economies, rural 
areas versus urban areas. We have small community banks in the 
rural areas. If we are going to increase the compliance burdens 
on a bank that has $100 million in assets sitting, is this 
going to stimulate economic activity or is it going to deter 
it?
    Mr. Blackley. I really have a tough time seeing how it 
would be possible to stimulate economic activity. We are a very 
large complex bank. We have sophisticated tools which are 
allowing us to prepare for CECL. It is going to take us a year 
running in parallel to ensure that our systems are prepared 
when this thing goes effective in 2020.
    I think that it would be considerably harder for a small 
institution that does not have the same scale and 
sophistication to be able to do that. I also think that CECL 
has the propensity, as Mr. Nelson was saying, to really punish 
consumer and small business lending, because those loans 
typically have, people that are new to credit have, higher 
losses.
    The upfront burden of lending to those types of borrowers 
is going to make it less likely you are going to be able to do 
that. And that's right in the bailiwick of many community banks 
or small banks. I do think that it would be a headwind for the 
folks that you are talking about.
    Mr. Tipton. And just overall--and if you would like to 
speak to, just in terms of reducing some of the regulatory 
requirements, we had S. 2155 that my colleague had mentioned. 
We tried to be able to make sure that we have, not have 
regulations, but smart regulations to be able to have good 
outcomes.
    Is this going to run counter to actually having smart 
regulations to be able to help the economy move?
    Mr. Blackley. I think many of the decisions around 
tailoring that have been made, S. 2155 or some of the comments 
that we have seen from the Federal Reserve on tailoring are 
absolutely going in the right direction to try to tailor 
regulation to the size and the risk of an institution. CECL I 
think applies to everyone equally. It's hard for us all.
    I do believe that it is a bit of a step backward in terms 
of simplifying and making sure that the regulations that we all 
have to follow are appropriate for the size and the risk of the 
institution.
    Mr. Tipton. Mr. Nelson, do you care to comment on that?
    Mr. Nelson. I agree. I don't have much to add.
    Mr. Tipton. OK. Mr. Stieven?
    Mr. Stieven. I have nothing to add. But I agree.
    Mr. Tipton. OK. Mr. Chairman, I think that we have an 
opportunity to be able to address something that is going to be 
regulatory overreach. And I hope that this hearing is going to 
be able to highlight the real impact that it is going to have 
on the financial institutions. But ultimately, on the moms and 
dads that are trying to be able to provide for their families 
at home and to be able to build those small businesses.
    Thank you, and I yield back.
    Chairman Luetkemeyer. The gentleman yields back. With that 
we go to the gentleman from Washington. Mr. Heck is recognized 
for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman. It is always a good day 
when you have the opportunity to ask one's favorite economist 
in the country a couple of questions, Mr. Zandi. I want to take 
a slightly different tack--
    Mr. Zandi. By the way, my forecasts are always right, so.
    Mr. Heck. We have obviously seen a significant shift in 
some lending markets. Some might even say dramatic shift in 
some lending markets from banks to non-banks over the last 
decade. I am frankly not entirely sure what is causing that. 
But I hope it is not bad policy.
    This rule obviously applies to all lenders. I am wondering 
if you could talk about how you think it might be implemented; 
if so, differently with respect to regulated banks and credit 
unions versus non-banks. And whether or not you think this 
brings us closer to a level playing field or the opposite. Or 
does it not have any effect in your opinion?
    Mr. Zandi. I think because it does apply across the board 
to all financial institutions, whether they are in the 
regulated part of the system, the banking system or in the non-
regulated part of the system, I don't think it should change 
the playing field to any significant degree. I am sympathetic 
to your point though, that we have seen risk move from the 
regulated part of the system, the banking system to the 
unregulated part of the system, the shadow system.
    In part because some of the regulations, some of the 
capitalization requirements, liquidity requirements on the 
banking system have changed the economics and pushed risk out. 
And that is one of the limits to requiring the banks to be even 
more highly capitalized. And we have to be very careful and 
sensitive not to overdo that, because the risk will just go 
somewhere where it is less transparent and do more damage.
    In fact, you can--a quick tangent. You can see this 
happening in the leveraged loan market. This is lending to 
highly levered non-financial corporations. And a lot of that is 
being done by non-banks. And this is where the real financial 
vulnerabilities are in the current system.
    But in terms of CECL and the adoption of CECL, I don't see 
that--I have not seen anything that would suggest that it is 
going to change the dynamics between the regulated part of the 
system and the unregulated.
    Mr. Heck. I guess I am prompted and I do not mean to cast 
aspersions or impugn motives in any way. But on the one hand, 
you will have the banks and the credit unions overseen by 
Federal regulators with respect to how it is that they 
construct their models and their assumptions, and the non-banks 
you don't and where are the incentives there.
    But I have another question I want to get to. Since GSE's 
(government-sponsored enterprise) have been referred to a 
couple of times here, I can't help but ask. It's been mentioned 
in press reports that the President is considering nominating 
somebody to head the FHFA who is an open advocate for winding 
down if not eliminating the GSEs. And is opposed to the 30-year 
fixed mortgage. I am wondering if you would care to comment 
about what you think the implication to the economy would be if 
that were to be realized. And if you have time and you do not 
have a lot, compare it to the effect on the economy, for 
example, of CECL and any contraction that may occur there.
    Mr. Zandi. Yes. Good point. Clearly, there is a momentum 
toward scaling back the GSE's footprint, Fannie and Freddie and 
the potential changes at the FHFA seem to signal that we are 
moving in that direction. My hope is, my sense is that once the 
person running the show is there, that they will have second 
thoughts about eliminating the 30-year fixed-rate loan or 
significantly scaling back loan limits or raising G-fees, 
things that would do a lot of damage to the housing market 
which is already struggling in the current rising rate 
environment.
    So I think better angels will prevail when you are actually 
having to sit down and make a decision. But clearly, it's 
something we need to watch very carefully. And it is a matter 
of--
    Mr. Heck. Would you be very concerned if that stated 
preference were to be pursued?
    Mr. Zandi. Clearly, that would be a huge error. And it 
would do a lot of damage to the housing mortgage markets, to 
homeownership, and ultimately to the broader economy. Pretty 
bad idea. And that would--CECL would pale in comparison to what 
we are talking about here, and potentially with the GSEs.
    Mr. Heck. Might I just add parenthetically and to conclude 
that I think we have seen the movie before where we finished 
the sentence. Once they are there, better angels might.
    With that I yield back, Mr. Chairman.
    Mr. Zandi. Good point. I hear you.
    Chairman Luetkemeyer. The gentleman yields back. Now we go 
to the gentleman from Georgia. Mr. Loudermilk is recognized for 
5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman. I appreciate the 
panel being here, incredibly important issue that we are 
talking about here. And as I was listening to all the panelists 
and my colleagues up here, my mind went back to when I worked 
intelligence in the Air Force.
    One of our contractors that worked with us developing IT 
systems was tasked, was developing a hack-proof computer to 
handle all of the analysis of our intelligence because security 
was a concern. And they did it. They actually produced a system 
that could not be hacked. The problem was it was not useful. No 
one could use it. It was too slow. So we backed off and we 
said, OK, the importance is managing the risk, which is really 
what we are talking about here.
    And I fear that from a small business standpoint, that what 
bean counters in ivory towers sometimes miss is what the 
underlying strength of our economy is, it is an 
entrepreneurial-based economy. And that is why what works in 
Europe does not necessarily work here in the United States 
because we are an entrepreneurial-based economy, which really 
breaks down to those who have money managing the risk to allow 
those who don't have the money or need the money at the time 
they need it to borrow that money.
    It's always about managing the risk. And I think what we 
try to do is regulate away all the risk, which basically 
results in the people who have money only being able to loan it 
to the people who do not need the money at the times they don't 
need it. We have seen that happen over and over and over again.
    And I have heard us talk about, that CECL itself will not 
raise the cost of lending or it itself won't reduce the number 
of loans. But the real result is when it comes down to it, in 
the bad times, which I don't see how you can say this isn't 
cyclical, it is definitely pro-cyclical because during the lean 
times when small businesses like mine needed to borrow the 
money the most and could not borrow it, the banks are going to 
look at, if the projection is this business is going to be a 
little bit more risk, I am just not going to make that loan 
because I don't want to hold on to that additional capital that 
I could be using to make more loans.
    And then when you talk about the complexity of it, the 
biggest complaint I am getting from our small banks and credit 
unions right now is the number of compliance specialists that 
they already have to have. And if you are going to increase the 
number of compliant specialists, it is going to be additional 
cost to the consumer, to the small business, which the end 
result is less money to loan.
    And I think there is some empirical analysis that would 
back this up. Mr. Nelson, if I am not mistaken, your 
organization, the Bank Policy Institute, did do an analysis of 
the previous economic crisis. And if I am not mistaken, did not 
your analysis show that had CECL been in effect in 2009, it 
would have actually--the 10 percent reduction in loans would 
actually have been increased to 19 percent. Is that true? Would 
you like to elaborate?
    Mr. Nelson. That's correct. So we estimated that had CECL 
been in effect, banks' CET, common equity, capital ratios would 
have been more than 1-1/2 percentage points lower at the worst 
point in the crisis. And using estimates from another paper 
that was just recently published in the Journal of Finance, 
that additional net reduction in capital requirements, we 
estimate would have lowered bank lending by an additional 9 
percent, exactly as you said.
    Mr. Loudermilk. Now, I experienced some of this in my own 
business back in 1995 to 2000. I was best friends with my local 
banker because we were starting a business. We didn't have a 
lot of capital. We needed capital. They came in and said, 
``Look, you probably are not the person just on your books that 
we would loan to, but you have contracts and POs in hand that 
we know we can pretty much rely on.''
    And they loaned us money. We kept loans and lines of credit 
open up until 2001, 2002. We were doing so well I didn't need 
the money. I paid off all the loans, all the lines of credit. 
But then came 2008 and 2009 when our reserves were depleted. 
But I had the opportunity to do some very large projects.
    But I just didn't have the capital to buy the equipment. I 
go back to the same bank and they said, ``Can't do it anymore. 
The government's telling me I can't.'' And what that result 
was, is I had to do a massive layoff in my own business, which 
I would have probably been another one of those additional 9 
percent.
    Mr. Blackley, have the banking regulators conclusively 
stated whether there will be a corresponding offset in 
regulatory capital requirement for the additional capital 
required by CECL?
    Mr. Blackley. At this point, the only tangible rulemaking 
that has come out from the banking regulators is to give us 
relief and a phase-in period over 3 years for the initial 
adoption impact of CECL. What we have not yet seen is any 
adjustments that will need to be made for what I conceive as a 
double count of the consequences of CECL on capital. And they 
have also not clarified how they might need to adjust the 
stress test under Dodd-Frank in order to address the changes 
that are under CECL. So we are still waiting to see how they 
may address those items.
    Mr. Loudermilk. Thank you. Mr. Chairman, I yield back.
    Chairman Luetkemeyer. Gentleman's time has expired. With 
that, we go the gentlelady from New York, Mrs. Maloney. She is 
recognized for 5 minutes.
    Mrs. Maloney. Thank you, member, for calling this hearing. 
Dr. Zandi, I understand CECL requires banks to immediately 
recognize expected losses on a loan but not any expected income 
on the loan. And what is the reason for this? Is it just to 
make banks err on the side of caution?
    And I might add that on stress tests, they also require 
banks to assume losses on the Federal stress tests but not 
income on those loans. So could you comment on that and your 
understanding of it?
    Mr. Zandi. Sure. You are right. As currently envisioned, 
CECL does not allow the institutions to recognize interest 
income. And there has been a proposal to in fact allow that to 
occur, which is not unreasonable. Although if they are going to 
recognize interest income, they should also recognize the 
interest expense.
    Now, this all sounds very easy to say and for an economist 
to say it pretty straightforward. But there are all kinds of--
this would really complicate the implementation of CECL. And 
there may be many other accounting issues involved and I am not 
even aware of, that are deep into the accounting standard.
    So in theory, it is probably not a bad idea. But in 
practice, I am not sure it is going to change the result here 
to any significant degree. But it will certainly raise the 
complexity of what is being proposed here.
    Mrs. Maloney. Also, Dr. Zandi, there seems to be a general 
agreement that the accounting standard for loan losses should 
not be pro-cyclical and should ideally be counter cyclical. And 
you acknowledged in your testimony that if CECL had been in 
place during the financial crisis and the Great Recession, it 
still would have been pro-cyclical but much less pro-cyclical 
than the old accounting standard.
    Is there any accounting standard that would have been 
counter cyclical during the Great Recession?
    Mr. Zandi. It is a great point. And just to reinforce the 
point, CECL will not be counter-cyclical. It will simply be 
less pro-cyclical than the current incurred loss accounting 
system, which is highly pro-cyclical. Meaning, it opens the 
floodgates during the boom times and it really restricts the 
available credit in the bad times. That is what CECL is trying 
to correct.
    Now, there are some things that in theory could be done to 
try to make CECL even less pro-cyclical or even counter 
cyclical around setting the economic scenarios and how they are 
determined in the future. That would be one way of going about 
doing it. Or even around the amount of loan loss provisioning 
that would occur for different types of lending at different 
points in the cycle.
    But as you could tell, this is getting to be very, very 
complex. And I am not sure we get significant lift. In my view, 
let us just take this step. This is a very good step. It is not 
as complex as people think. There is a lot of flexibility here 
so that small banking institutions and credit unions can adopt 
this very painlessly. And this will make the system less pro-
cyclical.
    Meaning, we are not going to have these bubbles. Or at 
least to the same degree, we are not going to have these busts 
to the same degree. We are going to still have bubbles and 
busts, but just not to the same degree.
    Mrs. Maloney. I would like to, Mr. Nelson, if you would 
follow up and comment on this. Is there another accounting 
standard that would have been counter cyclical during the Great 
Recession? And if you want to comment on how CECL could be 
tweaked so it could have been counter cyclical in any way in 
addition to what Dr. Zandi has said?
    And I would also after Mr. Nelson invite other members of 
the panel if they would like to comment on it. Mr. Nelson?
    Mr. Nelson. Thank you. But first, let me comment on Moody's 
conclusion that CECL would in fact be less pro-cyclical than 
the current accounting standard. And that result was released 
in a paper that was released at the end of last week. 
Unfortunately, there are some analytical flaws and mistakes in 
the paper that make that paper an unreliable guide for the 
cyclical properties of CECL. And I will name just two of them.
    First of all, the analysis is based on only a single type 
of loan, 30-year mortgages, 30-year fixed-rate mortgages and 
only on the highest-quality types of those loans. Consequently, 
it is not surprising that those loans do not exhibit a lot of 
cyclicality in their performance over the business cycle.
    But second, and perhaps more critically, when they do their 
analysis and as they have to estimate what the allowance would 
be under CECL and what the allowance would be under incurred 
loss. When they estimated the loss under CECL, they assumed 
that when a mortgage goes bad, banks would be able to recover 
65 percent of that loan. But when they did the analysis for the 
incurred loss methodology, they assumed that if the loan went 
bad, they would recover nothing on the loan. Correcting for 
that mistake by itself overturns their finding that the CECL 
allowance would be less pro-cyclical than the incurred loss 
allowance.
    To answer your question, there are a number--I think the 
very fact that what we are asking for today, is that based on 
the serious concerns that have been raised and the complexity 
and magnitude of this issue that there be time to wait, to not 
implement it, and to take time to study further and develop 
alternatives.
    There have been suggestions raised. The regional banks led 
by Capital One have put forward a proposal that deserves 
serious consideration.
    Mr. Stieven. Thank you for your question. No. 1, I don't 
believe there is a way to remove business cycles. Period. So I 
think the best thing that you can do to help the safety of the 
banking industry is what you did in Dodd-Frank. The foundation 
of bank capital is tangible common equity.
    If you look at the improvements that you, along with your 
regulations, along with the regulators have done, you have done 
an excellent job. I am not trying to pat you on the back, but 
you actually did a good job. The concept of using reserves to 
quote/unquote be counter--no. Your eye has to remain on the 
ball, which is tangible common equity.
    Chairman Luetkemeyer. The gentlelady's time has expired. 
With that, we will go to gentleman from Kentucky, Mr. Barr. He 
is recognized for 5 minutes.
    Mr. Barr. Thank you. I would like to continue that 
discussion a little bit because I definitely share concerns 
that CECL if implemented could in fact have some pretty--maybe 
unintended consequences in a downturn from a standpoint of 
access to lending and access to capital for those businesses 
and firms and households that could lead a recovery.
    But I wanted to ask the other panelists to comment on Mr. 
Zandi's argument that in fact the CECL proposal is less pro-
cyclical than the incurred loss standard. If you disagree with 
that, can you elaborate--and I will start with Mr. Blackley.
    Mr. Blackley. Yes, thank you for the question. Look, from a 
practitioner's perspective, building allowances, what I know 
for certain is that it is very difficult for a bank to project 
a future that is different from what we are seeing today. I 
think that CECL is going to be pro-cyclical by that very fact, 
because as we move through the cycle, we will be picking up 
increasingly big forecasts of losses. Those will be coming in 
to our allowances as we move.
    Mr. Barr. Can I interject a question?
    Mr. Blackley. Certainly.
    Mr. Barr. What Mr. Zandi, what I think I heard him say is 
that if you reserve more, that will strengthen the financial 
condition of the institution during a downturn. What about that 
do you disagree with?
    Mr. Blackley. Certainly having a strong capital basis is 
critical to all of banks. And what is going to happen is we are 
building our reserves, that actually will be reducing our 
capital levels. At the point of an economic downturn where 
things are really starting to decay, we are going to be very 
cautious with deploying that capital.
    And that means that under CECL where you have to front-load 
the penalty for making a loan, that is just going to put 
pressure on us to make loans to small businesses to any of the 
types of credits that tend to have a higher loss rate to them. 
I do believe that it is going to be pro-cyclical and bad on the 
economy.
    Mr. Barr. Mr. Zandi, you have heard what Mr. Stieven has 
said on multiple occasions I think very persuasively. And that 
is that we have strengthened the capital position of these 
institutions significantly both in terms of Basel III and in 
terms of CCAR stress testing capital regimes that are now in 
place.
    My question to you is, given that, what problem are we 
trying to solve here?
    Mr. Zandi. We are trying to reduce the cyclicality of the 
provision of credit in the impact on the business cycle. We are 
now in a boom time. These are good times and credit is flowing. 
Underwriting standards are declining. You can particularly see 
this in the lending to not large, non-financial corporate 
businesses. Janet Yellen gave a speech last night talking about 
this as an existential threat to the economic expansion.
    Under current laws, the provisioning is very low for those 
loans because there are no defaults.
    Mr. Barr. But if the cap--what he is saying though is if 
the capital levels are extremely healthy--
    Mr. Zandi. They are. But we want a safer and less cyclical 
system. So right now, under CECL, the banking and non-bank 
institutions, the private equity firms, hedge funds, anyone who 
is extending this credit would have to be reserving more today. 
Their earnings would be lower. Their capital would be lower and 
they therefore would extend less credit.
    Therefore, when we get into the recession, this will be 
less of a risk.
    Mr. Barr. I would love to hear your response to that. Mr. 
Stieven.
    Mr. Stieven. The word ``incurred'' is past tense. My third 
grade English teacher would tell me that it is past tense. But 
if you look at bank industry data for the last 25 years, do you 
know how far out in advance the average bank has been reserved 
for the last 25 years?
    On average, two years in advance. So the concept that banks 
aren't looking forward currently, that is a joke. It is a 
mistake. It is not the truth. Banks are looking out.
    Mr. Barr. When you book a loss on day one, but you do not 
recognize the potential for loan revenue, does that mirror 
reality?
    Mr. Stieven. I started as a bank regulator 35 years ago. I 
grew up with that. I would say I am biased to keep it because I 
want a strong banking system, and we have it. But now too as 
Jamie Dimon once said, ``We have gold plated standards.'' And 
now you want to keep going higher? Where do we stop? Is 100 
percent capital the right number for banks? That means they do 
not make loans.
    Mr. Zandi. Congressman, to answer your question, from the 
portfolio of the loans, absolutely yes. You entered loans to 
them we know are going to default and there is going to be a 
loss given default. So why don't we recognize that when it 
happens? Because we know it.
    Mr. Barr. My time is expired. But this is a very 
interesting conversation. Thank you very much. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired. 
Then we go to the gentleman from California. Mr. Sherman is 
recognized for 5 minutes.
    Mr. Sherman. Thank you. I am a little concerned about 
talking about being counter cyclical. From an economic 
standpoint, I can understand we want our banks to be lending in 
the bad times. But the fact is that the financial services 
industry is a very volatile business. You make money in the 
good times. You lose money in the bad times.
    And in other industries, at least, people try to smooth 
earnings, make investors think that things are all smooth when 
in fact life is jagged and people have gone to jail for 
smoothing earnings, which sounds to me like something very 
close to designing an accounting system that is designed to 
hide the cyclicality.
    One way to deal with this, if this were to go into effect, 
would be to elect fair value accounting. Mr. Blackley, as I 
understand it you can get out of all these rules and just go to 
another system of rules? What is the matter with that?
    Mr. Blackley. Wow, there are so many--
    Mr. Sherman. You could elect that now. You could elect that 
later. And I know your institution is pretty big and 
sophisticated. Could a small bank implement fair value 
accounting and just mark everything to market all the time?
    Mr. Blackley. In the best of times, a bank's ability to 
know the current fair value of an asset that doesn't trade is 
limited. You are using financial projections. In the worst of 
times when you have a variety of different opinions, you see 
spreads, or the difference between buyers and sellers and their 
view on what an asset is worth, widen out considerably.
    Mr. Sherman. And then if you have to make a bunch of 
estimates, you can smooth earnings, hide bad results from your 
shareholders. Or be honest, but be accused of trying to smooth 
earnings or hide losses from shareholders. The more projections 
and estimates you make, the better it is for the trial bar. 
They need to sue somebody.
    But I want to go to Mr. Zandi. I can see a reason for 
reserves on the balance sheet. Have you looked at what this 
means for the income statement? Should we--you put forward 
really that perhaps the right answers for the income statement 
might be too difficult to implement. And that is if you make a 
hundred loans and two of them are going to go bad, and 98 of 
them are going to be good, and on those loans, you are lending 
the money at seven and your cost of capital is three. So you 
are making pretty good money on the 98. You are losing money on 
two. If you recognize the loss on the two and you don't 
recognize the profit on the others, haven't you made things 
worse than not recognizing either?
    Mr. Zandi. I am very sympathetic to fair value accounting, 
very sympathetic to recognizing interest income and expense. I 
do not think though the banking industry and the rest of the 
financial system is to the point where they would go--you can 
hear it and they do not want to go down that path. That is a 
very long road. Maybe someday. But a baby step is--
    Mr. Sherman. Basically, fair value is you go up and down. 
And what you are proposing is, do the down, but do not do the 
up. That would tend to give a worse number.
    Mr. Zandi. All I am saying, all I am proposing is, we know 
when we book loans and we have a portfolio of loans, we know 
with a high probability because of historical experience that 
this percent is going to default and we know the loss given 
default.
    Mr. Sherman. But you also know, with the same kind of 
experience, that the ones that don't default are going to be 
profitable.
    Mr. Zandi. Yes.
    Mr. Sherman. The very fact that banks exist and have not 
all gone bankrupt means that every time they--usually, when 
they make a hundred loans, only two or three of them go bad and 
the others are actually profitable. The profit on 97 loans just 
as much as you know the loss on the three loans.
    Mr. Zandi. The only thing I would say, I am sympathetic to 
what you are saying. The only thing I would say is we are 
trying to, in my view, solve for the following problem. We know 
the current accounting system is highly pro-cyclical. It messes 
things up in recessions. We saw it plain as day in the Great 
Recession. Let us just make this better. This is--
    Mr. Sherman. Yes. I just want to comment on Mr. Nelson's 
answers to Carolyn Maloney and that is, I think you will inform 
the committee that whether this is less pro-cyclical or not, it 
deserves additional study that for us to come in and say, this 
is going to be less pro-cyclical because somebody did an 
analysis of its effect on fixed-rate 30-year prime mortgages, 
frankly the financial system does a good job of making 
mortgages.
    I need money lent to businesses, and has a study been done 
on whether this is pro-cyclical or anti-cyclical or less pro-
cyclical with regard to the business loans that we are relying 
on banks to make?
    Mr. Nelson. Certainly, our study estimated loan losses for 
all the different types of loans on the banks' portfolio and 
then we use that information on the banks' portfolio of loans, 
the aggregate banks' portfolio of loans to come up with CECL 
analysis, so--
    Mr. Sherman. And did you see some analysis show that it 
made the thing more pro-cyclical or less pro-cyclical?
    Mr. Nelson. It was much more pro-cyclical. Significantly 
more pro-cyclical because thanks--it is--
    Mr. Sherman. This thing needs more study. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    With that, we will go to the gentleman from North Carolina. 
Mr. Budd is recognized for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman. I appreciate you having 
me here as your guest over from Capital Markets and it is good 
to be able to shine a spotlight on this. I remember when the 
North Carolina Banking Association came in over a year ago and 
raised this issue with me. And it is good to have it in such a 
forum today, so thank you again, Chairman.
    Mr. Nelson, I would like to start with you and ask you a 
couple of questions and some of this today from both sides of 
the aisle, it's been--it will be a bit of a summary, so if you 
could help pull this together toward the end of the afternoon 
here.
    Your research over at BPI, it found that CECL would have a 
negative impact on lending during a recession, the cyclicality 
issue we have been talking about with various members today.
    So in that vein, could you describe the impact and more 
specifically what would happen to borrowers who are dependent 
on bank lending in a recession?
    Mr. Nelson. In a recession, particularly borrowers that are 
dependent on bank lending or particularly households that can't 
issue--get loans that are securitized and packaged away. It is 
small businesses as well.
    And those borrowers are the ones for which banks are going 
to have to particularly take significantly larger allowances as 
they mark down their outlook for the economy.
    Banks will therefore reduce lending to those individuals 
and those types of borrowers. And that will raise costs on 
those loans.
    Mr. Budd. So let's just continue, so the Fed's Vice 
Chairman for Supervision Randal Quarles said recently that a 3-
year phase-in of CECL would help the Fed understand any 
unintended consequences of adoption of CECL.
    Mr. Nelson. Right.
    Mr. Budd. Sounds like a great idea. But does that 
commitment really address your concerns that CECL would have 
negative impacts on bank lending during a recession?
    Mr. Nelson. No, it wouldn't, and so it's a good point. The 
3-year phase-in is really only to let the banks have time to 
adopt CECL. It is not to let everyone observe what happened, to 
then make changes to CECL.
    The concerns that we have raised, the pro-cyclicality, the 
negative impacts for small business lending, student lending, 
lending to households that don't have absolutely perfect credit 
scores will all still be there.
    Mr. Budd. Mr. Stieven, I have enjoyed your thoughts so far 
today, would you have anything you care to add to that 
regarding the 3-year phase-in?
    Mr. Stieven. When the Federal Reserve says they still don't 
have all of this fully implemented in their models, I think 
that reflects upon the complexity, that is number one. I would 
very much like to address Congressman Sherman's question, which 
was an excellent question.
    If the CECL model is so great, why is it you could choose 
not to do it and just go to fair value? That is what you said, 
which you are correct, sir, but let me bring this back home for 
you right now in your State.
    I have a lot of great bankers I know in California. You 
have been devastated by these wildfires. If you believe in fair 
value, what would you tell me is the fair value of a lot of the 
properties near and around those wildfires? They have obviously 
gone down. I am telling you, FV says mark them down. But, the 
good bankers are trying to run there and help their 
communities. CECL is a very pro-cyclical model.
    Mr. Budd. Thank you. Mr. Chairman, dare I say reclaiming my 
time. I love that. Mr. Nelson, just continuing on with a couple 
of other questions. Historically the FASB, which the SCC 
overseas has been considered the world's pre-eminent accounting 
standard setter because of the rigorous process for developing 
the rules of the road for American companies.
    With that said, I am concerned that recent accounting 
standards like the CECL, the forthcoming long-term duration 
standard for insurance companies. They have not been subjected 
to the rigorous field testing and other due diligence that was 
applied prior to the financial crisis. So CECL, like the long-
term duration standard, does not appear to have been 
sufficiently vetted prior to becoming effective.
    That is one of the things we have talked about today. So in 
your view, would processes like comprehensive field testing or 
independent investor surveys and cost-benefit analyses, would 
they give the SEC and the FASB the opportunity to identify and 
address problems with CECL that we are hearing about today?
    Mr. Nelson. Yes, absolutely and the Bank Policy Institute 
wrote to the FSOC to encourage them to study further this 
problem. We recognize that this is a complex problem and for 
the--we have asked the Fed to look into it.
    Further study is needed in order to understand the 
implications for the economy. Everyone agrees this is a major 
change. But we don't yet understand what the implications for 
the economy are going to be. It seems very likely that it is 
going to make business cycles worse.
    It is going to make the financial system even more of an 
amplifier of business cycles and that should be understood 
before taking such a big change.
    Mr. Budd. Thank you to the whole panel and with no time to 
reclaim, I yield back. Thank you.
    Chairman Luetkemeyer. If the gentleman would like a little 
bit more time we certainly would lean in toward that if you 
have a very short question.
    Mr. Budd. No, this is perfect. Thank you.
    Chairman Luetkemeyer. Thank you.
    With that, we will go to the gentleman from Arkansas. Mr. 
Hill is recognized for 5 minutes.
    Mr. Hill. Thanks, Mr. Chairman. Thank you for doing this 
hearing. It is good to have the panel before us, of experts. We 
are grateful for your time. Following up on my friend from 
North Carolina.
    So that means that FASB doesn't follow the best practices 
that Chairman Luetkemeyer laid out, so are we saying that in 
this CECL proposal they did not do pre-issue field testing, yes 
or no? To the best of your knowledge Mr. Nelson?
    Mr. Nelson. Not to the best of my knowledge and--
    Mr. Hill. And they didn't do independent investor surveys 
to see how the market would react to this to the best of your 
knowledge?
    Mr. Nelson. I shouldn't say. I don't know the answer to 
that.
    Mr. Hill. OK. And then cost-benefit analysis Mr. Stieven 
addressed and do you have anything you want to add on that?
    Mr. Stieven. The FASB did talk to investors. I don't 
remember the exact number. Because this is a bank-specific 
model, I participated on several calls. There was not one bank-
specific investor that we called that supported this model.
    Mr. Hill. Thank you. So I have been in Congress 4 years. 
Before that I was in the financial industry for 35 years or so 
including in the commercial banking industry, and in the 4 
years I have served in the House only two things have prompted 
a slew of phone calls into my office from community bankers. 
One was Treasury's beneficial ownership rule that was put out 
last May and the other was CECL.
    Everybody else has their list of things they would like to 
see improved along the way on Dodd-Frank, but these two have 
really struck a chord with community banks. And in looking at 
the definitions, it says CECL requires consideration not only 
of past events and current conditions, of course, that is what 
we have now, but also supportable forecasts that affected 
expected collectability.
    The standard does not mandate a specific technique for 
estimating credit losses, allows companies to exercise judgment 
to determine the methods appropriate for their own 
circumstances, and institutions are permitted to use loss 
estimation techniques already employed. So what is the point of 
this exercise, would be a question I have.
    How are we that much better off? And if we could put up a 
slide, you are asking community banks to make a forecast. And 
we have always used historic loss in setting loan loss 
reserves, rolling 8 quarters, rolling 12 quarters looking at 
shocks in recession periods, shock in individual sector 
analysis.
    We do all this and we have done it for decades. We have 
done it since double entry bookkeeping. But here is the Fed, 
they have 700 economists. That is their starting point and 
their revision of their forecast for GDP. It is never right.
    And they have all the economists in the world, not as good 
as Mr. Zandi but good. Let us go to the next one. Here is the 
Fed's forecast on inflation over here but the actual is, they 
have never been right, not once.
    This is about a decade's worth of data, so how do we expect 
community bankers to forecast unknown events in the future when 
I don't see the measurable difference in transparency for loss 
analysis for the bulk of assets on a commercial bank's books by 
taking this standard, particularly when you read the standard 
and it says, institutions are permitted to use loss estimation 
techniques already employed including loss rate methods, 
probability of default, discount cash-flow methods and aging 
schedules, meaning what we do right now.
    So if that is permitted right now then I am going to raise 
my hand at the board meeting when the senior vice president for 
credit administration comes in with this big gobbledygook 
proposal and says, ``Hey, I like it. That is fascinating but 
since you can't really tell me it's better, we will just stick 
with what we are doing now.''
    Is that permitted Mr. Stieven? Can I just stick with what I 
am doing now?
    Mr. Stieven. From my understanding, that is not going to be 
permitted.
    Mr. Hill. Even if I am a community bank and I don't have 
the Fed's wonderful ability to forecast, I still can't stick 
with what I am doing now, even if it demonstrates decade after 
decade that it is acceptable, that it actually is predictive of 
my actual losses.
    Mr. Stieven. Again, on my understanding, including my time 
working with the FASB, I don't know if that would be permitted.
    Mr. Hill. So maybe that is why Jamie Dimon suddenly after 3 
years or 4 years of talking about this finds it concerning even 
for the largest most sophisticated bank in the country.
    Thank you, Mr. Chairman. I yield back.
    Chairman Luetkemeyer. The gentleman yields back.
    With that we have concluded our questions today. And we 
certainly appreciate the witnesses' testimony. I just have a 
few concluding thoughts here. We have actually a minute or two 
here and what I usually try and do is give the witnesses all 1 
minute to just sum up some of your--if you had a question that 
you want an answer to, didn't get a chance or if you have a 
comment you want to make to somebody else.
    If you can hold it to 1 minute because we are looking at 
probably going to the floor here and voting very shortly, so if 
we--Mr. Stieven, we will start with you at 1 minute. You have 
anything you want to say, concluding remarks, summary?
    Mr. Stieven. I would say that you and Congress have 
actually done a nice job, along with the regulators, to improve 
the most important form of capital, which is tangible common 
equity. The United States banking regulatory system, and the 
banking industry, are in excellent shape. Thank you.
    Chairman Luetkemeyer. Thank you very much.
    Mr. Nelson?
    Mr. Nelson. Thank you and I would want to add that we 
strongly support the objective of making the financial system 
less pro-cyclical, unfortunately, Congressman Hill put his 
finger precisely on the problem.
    Economic forecasts including the forecast of the Fed, 
forecasts of all of the professional forecasters, they don't 
ever predict changes in the outlook that go from a downturn to 
an upturn or an upturn to a downturn, so even though despite 
the best intentions, what CECL will do is it will cause loan 
losses to rise sharply when you go into a recession and fall 
when you are going into a recovery.
    Chairman Luetkemeyer. Very good.
    Mr. Blackley?
    Mr. Blackley. Yes, just a couple of quick comments, first, 
I believe that Dodd-Frank and the post-crisis regimes are doing 
the job that they were built to do. We have a very well-
capitalized banking system.
    CECL is redundant to that. It is harmful. I believe that 
there is significant evidence that suggests that it's going to 
exacerbate an economic downturn. And given that, I believe that 
we need to change or eliminate CECL or adjust the capital 
regimes to reflect that fact.
    Chairman Luetkemeyer. Mr. Zandi?
    Mr. Zandi. Thank you to the committee for the opportunity 
to speak here and participate. It was a very productive session 
I thought. Just one quick point. You don't need to take 
anybody's forecast.
    You can look at your historical experience and that would 
be your forecast in the future. So it doesn't rely on my 
forecast. I--and believe me, I think I am great at what I do, 
but I don't predict any turning points very well, either, but 
you don't need to rely on me and CECL is not designed to rely 
on those kinds of forecasts.
    Chairman Luetkemeyer. Very good. Thank you gentlemen. I 
have a few thoughts and a few concerns that I want a voice here 
very quickly. Mr. Stieven, you gave us some information here 
and I entered it into the record with regards to your serving 
on the committee that oversaw this, the proposal, this rule and 
in this discussion of some of the papers that you presented 
there it was shown that the rule as Mr. Hill indicated as well 
was not done according to FASB's own rules, which really begs 
the question why? Why was it not? What is the concern? Who is 
trying to promote this? Who is behind this? What is really 
going on? It raises a lot of questions in my own mind.
    Another thought, all of you made the point that there are 
additional costs here to be borne by somebody whether it is the 
banks or the consumers. If that happens, the point I made when 
we were discussing with FASB was, hey, look if the costs are to 
be borne by the consumers, one of two things happen, either 
they are going to pay a whole lot more for this or they are 
going to do without services.
    If the banks have to do without presenting them with 
additional services, which has happened with smaller lending, 
which has happened with mortgage lending, there is more--I have 
banks from my district that no longer do mortgage lending.
    So suddenly now the banks have a CRA problem. They are not 
servicing the community. This is an unintended consequence of 
this proposed rule in my mind. So the other thing is where does 
FASB think that money comes from that we are going to segregate 
out?
    The banks already have a loan loss reserve, so we are 
segregating out existing income of the existing year's income. 
Is that where it is coming from? It is coming from loan loss 
reserves, take out those reserves and set them to the side out 
of capital on the conservative side? Whatever it is, it is 
already money. It's already in the system that we are 
segregating out.
    That is already. To me, this is a shell game of what they 
are trying to do with the money that serves for the capital 
reserves and income for the year. And it is nonsense in my 
mind. I am hopeful that we can, and also one other comment with 
regard to Mr. Hill in the comment he made with regards to the 
Fed economists.
    I have argued that point for a long time, but obviously 
FASB believes that the community bankers especially are better 
at estimating the local economy than the Fed and everybody else 
is, so that is very heartening to know that.
    With that, I would like to thank the witnesses again for 
the testimony today.The Chair notes that some members may have 
additional questions for this panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 5 legislative days for members to submit 
written questions to these witnesses and to place their 
responses in the record. Also, without objection, members will 
have 5 legislative days to submit extraneous materials to the 
Chair for inclusion in the record.
    And, with that, this hearing is adjourned.
    [Whereupon, at 10:34 a.m., the subcommittee was adjourned.]

                            A P P E N D I X



                           December 11, 2018
                           
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