Accounting Standards Next in Long Line of Cookie-Cutter Regulations

You’ve heard the old line that an elephant is a mouse built to government specifications? We’re all familiar with how government spending tends to grow rather than shrink. An equally troubling tendency perhaps even more familiar to community banks is the way governments often apply a cookie-cutter approach to their policies.

Regulations are inherently rigid and often fail to account for the unique circumstances of individuals and businesses. That often means a one-size-fits-all approach to a community banking model based on individual relationships and one-on-one service. Think Basel III—a capital framework designed for global financial institutions that nevertheless applies uniform standards on Main Street community banks.

While ICBA and community bankers have given everything they’ve got on Capitol Hill and at the regulatory agencies to institute a system of tiered regulation based on size and risk, a radical change to financial accounting due out as soon as this year threatens to deal yet another blow to locally based banking.

The Financial Accounting Standards Board is expected to release its updated accounting standards on credit losses in the fourth quarter. These new standards would require complex modeling and compel banks to recognize losses much earlier than necessary in the credit-loss cycle, penalizing community banks for investing in loans and securities.

What does this mean for community banks and their customers? For one, it will mean fewer loans. Currently, community banks don’t make an allowance for loan losses unless they have evidence that they’ll incur a default. Under the FASB’s “expected loss” model, banks would instead take a hit the moment they make a loan. Not only would banks have to recognize a loss on day one, but the proposal requires complex and expensive modeling tools that will inhibit the ability of local banks to make localized financial decisions. The Office of the Comptroller of the Currency estimates that the proposal will increase loan-loss reserves by an average of 30 to 50 percent.

Further, this plan will only add to the regulatory burdens overwhelming the community banking industry. Forecasting inputs used to predict potential loan losses will never be strong enough to satisfy the scrutiny of bank examiners. There will always be another rock to look under as examiners try to ensure a more precise model. So what we have is an approach to loan losses that is at once expensive, burdensome, time consuming—and yet never enough to satisfy examiners. Bottom line, this proposal is a double whammy of decreased lending and increased regulatory scrutiny for community banks and the customers they serve.

But there is one other saying that this whole deal brings to mind, which is that you should never try to out-stubborn a cat.

Community bankers are a stubborn lot and aren’t about to back down from this radical policy change. It’s why we’ve come up with an alternative proposal for institutions with less than $10 billion in assets that bases loan-loss provisions on historical losses for similar assets. It’s why we’ve met repeatedly with the FASB, including several times at the board’s headquarters in Norwalk, Conn. And it’s why nearly 5,000 community bankers signed a petition advocating ICBA’s simpler approach.

Our nation’s hometown banks have fought and clawed so they can continue serving their communities amid a raft of new regulatory burdens. We’re not about to let yet another cookie-cutter government regulation take hold without a fight.

Common Sense Prevails on Capitol Hill

regulationSometimes common sense really can prevail in Washington. It’s been known to happen before, but the latest example was the House’s recent removal of an onerous amendment that would have drastically increased IRS reporting requirements.

This particular amendment would have required banks to send a 1099-INT form to any depositor who earned any amount of interest in a calendar year, removing the current $10 interest-earned threshold. It also would have required banks to report to the IRS information on all non-interest-bearing accounts. So not only would this amendment set off a tidal wave of new 1099s for even the paltriest of savings account earnings, it would even expand reporting for accounts that earn no interest whatsoever.

Not only that, but this paperwork burden appeared out of nowhere in a piece of legislation primarily focused on supporting economic growth in Haiti and sub-Saharan Africa. No one has claimed credit for including it in the Trade Preferences Extension Act (H.R. 1295).

The good news is that following strong opposition from ICBA and others in the financial industry, the House overwhelmingly passed H.R. 1295 without this amendment. Responding in full force just as quickly as this amendment appeared out of thin air, we were able to get the House to leave it on the cutting room floor. I did say common sense prevailed, didn’t I?

Of course, ICBA remains on high alert. This legislation is expected to come before the Senate as it is currently written, without the 1099 provision. But we’ll continue monitoring the bill and working with lawmakers to ensure the provision does not sneak into H.R. 1295 like it did a couple weeks ago.

That said, I’m confident we’ve put out this fire for the time being. Now we can return to actively working to roll back excessive community bank regulation, rather than warding off new regulatory threats as they crop up. It’s clear by this recent success that logic and reason can indeed win out in Washington. So let’s keep the pressure on and see if we can get our nation’s capital to turn this flash of common sense into a trend.

Record-Setting Fines Still Megabank Pocket Change

Pocket-changeThe recent guilty pleas and fines against five of the world’s largest financial institutions demonstrate not that regulators are finally cracking down on megabank crime, but that it’s still business as usual on Wall Street.

Five global banks pled guilty to conspiring to manipulate interest rates and foreign currency exchange markets and have to pay nearly $6 billion in fines. But compared with the fines and lawsuits awaiting individual community bankers who exercise poor judgment in running their institutions, these megabank penalties are small potatoes.

While JPMorgan Chase, Citigroup and others pled guilty to market manipulation, no single individual from these institutions was called to account. A lengthy digital trail of chat room conversations from traders who called themselves “The Cartel” shows that plenty of individuals knowingly broke the law to line their pockets. Yet, not one of these individuals was held legally responsible for their illegal, anticompetitive and costly activities. Meanwhile, the institutions themselves have been granted waivers from regulators that allow them to continue operating and engaging in securities activities despite their violations.

For community bankers, this just doesn’t compute. In our neck of the financial industry, no one is above the law. Even boards of directors not directly involved in the daily operation of community banks can be hauled into court, publicly humiliated and held liable for poor judgment at their institutions. As I wrote in a recent letter to banking regulators, violations of this magnitude at a community bank would have promulgated the resignations of senior management and possibly the outright closure of the bank.

It’s incomprehensible to this former community banker that not a single Wall Street senior executive or director has been held culpable for violations that brought on the greatest financial crisis since the Great Depression. But Wall Street executives can break the law and suffer no personal consequences at all.

Even the nearly $6 billion in fines don’t register much of a blip on the balance sheets of institutions with a combined $7.9 trillion in assets. The fines represent just 7.3 basis points for these five banks. As Warwick Business School Dean Mark Taylor recently wrote, the $545 million fine on UBS would represent a whopping 15 percent ding on the megabank’s annual bonuses. Oh, the humanity! In fact, the financial markets reacted so positively to news of the fines that the share prices for several of the penalized banks increased. Like I said: just another day on Wall Street.

When you crunch the numbers, it’s obvious that even headline-grabbing guilty pleas and billon-dollar settlements don’t eliminate banking industry inequities. The United States has always held steadfastly to the ancient principle that all are equal before the law. And while that long-held value has applied even to U.S. presidents, it apparently does not apply to Wall Street executives.

If we truly want to rein in market manipulation, policymakers must adopt a fair and consistent enforcement policy that treats community banks and megabanks alike. There should not be one set of enforcement procedures for the largest institutions and another for everyone else.

Community Bankers to Washington: Let’s Work Together To Get the Job Done

800px-US_capitol_domeLast week’s ICBA Washington Policy Summit showed once again that community bankers are not only willing to go the extra mile—they’re even grateful for the privilege. With nearly 1,000 community bankers and industry advocates in the nation’s capital to advocate positive reform in more than 300 meetings with policymakers, there was a feeling of enthusiasm and optimism unique among community bankers.

They rolled up their sleeves to solve problems, support local communities and expand access to credit like it’s their job. (That’s probably because it is.) And just like the hard work that community bankers put into their local communities, their efforts in Washington are already paying off.

As I wrote in Morning Consult before the summit, the industry focused its meetings with Congress and federal regulators on right-sizing regulation, instituting uniform data-security standards, and ending taxpayer subsidies for credit unions and the Farm Credit System.

First, community bankers urged congressional support for the CLEAR Relief Act (H.R. 1233/S. 812) and the Community Bank Access to Capital Act (H.R. 1523) to ease excessive regulation and promote access to capital on Main Street. Second, attendees called on policymakers to impose Gramm-Leach-Bliley Act-like standards on other players in the payments system, including retailers, to ensure meaningful consumer protection. Finally, the industry took on unwarranted tax subsidies for credit unions and the Farm Credit System to ensure a more consistent and less costly approach to taxing financial institutions.

In other words, community bankers came to Washington to support common sense and consistency—an appropriate regulatory structure, a level playing field. By rolling up their sleeves and digging in, community bankers have shown a readiness to put in the work that is needed to advance positive reform. And as I noted—we’re seeing results. H.R. 1233 has added 22 cosponsors since last week to bring its total to 40 in the House, and S. 812 has tacked on eight for 29 total Senate cosponsors.

But we need to continue applying pressure on Congress to ensure passage of these critical reforms. The Washington Policy Summit might be over, but community bankers everywhere can stay in touch with their policymakers via ICBA’s Be Heard grassroots website. Follow up with your congressional delegation and hold their feet to the fire. By advocating positive reforms in letters to Congress, we can all go the extra mile to ensure community banks can continue to support local customers and communities one loan at a time.