Haresh Sapra: Why current accounting rules could stop banks from lending


– So the banks are not the bad guys here, but they have an opportunity
to be the good guys, actually, because in being very careful in terms of helping to channel
this money to the right firms, they could help
and spur the real economy. (Acoustic music) What would happen if these banks essentially did not use
CECL appropriately? And actually what happened
is they essentially ignored the accounting standard
and chose the delay, to postpone it and started using it, implementing it, at the beginning of 2021. I think this is very
misguided for the economy – misguided for the economy
because you’re going to hurt the real economy because
this is precisely the time when banks need to be lending. And this is the point of the CARES act. This is money being given to
banks to lend to borrowers. If we stop lending right now,
this is going to really hurt the economy for a long period of time. In fact, they could be lending to the wrong types of borrowers. And then there will be huge
write-offs in the future, and this takes us back
to the financial crisis. This is precisely what was happening. What was happening is
banks were lending money to borrowers that were
essentially very, very poor risks. And it took a while for us to recover. So we should not make that mistake again. We should learn from the
lessons of the financial crisis, and this is an opportunity. In fact, interestingly, I would
say that during the financial crisis, the banks were the bad guys. This is no longer the case.
There have been a lot of changes in regulation, such as stress tests. The Dodd-Frank Act
implemented stress tests, and then the banking regulators increased the capital buffers. So the banks are not the bad guys here. But they have an opportunity
to be the good guys, actually, because in being very
careful in terms of helping to channel this money to the right firms, they could help and spur the real economy. So I view this as a great opportunity, but that would come at them
implementing CECL appropriately. Companies are facing multiple
challenges right now. In my mind, the biggest challenge is they are facing a cash crunch. They’re facing a cash crunch
because essentially everything has been frozen in the economy. They’re losing essentially
their customers. They have to continue
paying their suppliers to make sure that they
maintain these relationships. So most companies right now
are facing a cash crunch, but in my mind it’s temporary,
and this is precisely the objective of the CARES Act. The idea is that this
is precisely the time when the government needs
to essentially funnel this money to companies so
that they can keep paying their suppliers and their employees, because they’re not essentially collecting cash from their customers. Their customers will come back, but this is going to take time. Most people are at home, right? And they’re essentially focusing
on the most basic needs. Which is what we saw with toilet paper, right? They are essentially looking
for masks and food, right? So some businesses are
benefiting from this, but the general economy
essentially is essentially really hurting as a result of that. So essentially getting
cash from the government, and paying their employees,
and gradually essentially coming back out of this. And this is going to take time and patience, but the important thing is
that banks need to keep lending to these companies so that they can keep making their payments, right?. And that again, as I said,
requires a lot of patience. And also this is where,
again, the accounting would help because those companies
that are very disciplined in their risk-taking and
banks are properly monitoring these risks, will emerge from this crisis in much better shape.

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