Outside the Box: A new accounting rule on loan losses could be disastrous for the economy

Beginning in 2020, the Financial Accounting Standards Board (FASB) will require large financial institutions and smaller banks to estimate and report loan losses upon origination according to the Current Expected Credit Loss (CECL) standard, commonly referred to as the loan-loss rule.

In recent congressional testimony, JPMorgan Chase CEO Jamie Dimon charged the rule will constrain banks and stymie lending. Even more portentously, CECL does not work: a major conceptual error in FASB’s guidance will cause significant losses to be reported where none exist and could result in a further significant decline in lending, which in turn could exacerbate a potential recession.

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