Last week, a group of community bankers from the Independent Community Bankers of America (ICBA) and representatives from the American Bankers Association (ABA) met with the Financial Accounting Standards Board (FASB) to discuss concerns about the upcoming impairment standard on credit losses. The meeting came partly as a result of two years of requests from the ABA to consider the implications of accounting changes on community banks.The conversation focused on the potential for FASB’s Current Expected Credit Loss (CECL) to inhibit community banks from meeting the needs of their local customers and communities. The CECL proposal would force community banks to record a provision for credit losses once they issue a loan. The plan represents a major change in community bank accounting methods. It could cause a 30-50% rise in loan-loss reserves, which threatens to increase the cost of lending dramatically, restricting the flow of credit to local communities – potentially harming consumers and economies.
Implications of the CECL Standard Decisions for Banks
The HORNE Banking team has carefully evaluated the most important discussions, requests and decisions from this session. Below are the highlights we think are most valuable for helping you make sense of the conversation and how the decisions could impact your bank.
Bank representatives and regulators agreed that a forward-looking model has value if it allows them to maintain a loan-loss that represents their knowledge of the loan portfolio. Nonetheless, ICBA and ABA representatives remain concerned that the first draft of the CECL standard does not sufficiently clarify implementation requirements. The concern is that the standard would force them to rely on computer models or global data to dictate loan-loss. These banks want the ability to amend loan standards based on what is actually happening in their community. For example, if a factory in their town is shutting down and causing layoffs, they want to adjust lending standards before they begin to see credit losses – often months after borrowers have lost their jobs.
FASB board members and staff offered reassurance that the standard will allow for a model that fits the community bank preferences, saying that it does not require a computer model. They stated that they have already removed requirements to consider multiple outcomes and disclose a roll-forward of the loan portfolio. They reiterated the scalability of the model, allowing banks to apply the standard based on their size and the complexity of their loan portfolio. Among the reassurances, FASB members indicated there is no need for banks to project past the “foreseeable” future, saying they should use historical loss rates for anything past that point (as they currently do).
Regulatory bodies professed their commitment to educating examiners and said they would not try to implement a one-size-fits-all approach to the standard. The Federal Reserve shared that they have already begun meeting with examiners to explain that they should expect to see CECL implemented differently in different banks. They also assured community bank representatives that they should not be concerned about trickle-down from the complex models bigger banks will be using.
Despite the pointedness of the three-hour discussion, there remains uncertainty around how the loan-loss reserve will be accounted for in the future. ICBA representatives recommended that FASB continue to clarify the CECL standard, including providing examples of practical applications for community banks and clearer definitions of terms key to the standards such as “life of loan” and “expected loss,” and requested a second exposure draft before the final standard is released. They also asked that the items promised in the meeting in writing before the final standard is voted on and implemented.
While FASB would not make any promises, attendees expressed more comfort with the standard as a result of the meeting. Representatives from all parties will continue to work closely to secure acceptable changes and outline a practical transition to the new accounting standards.
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