Community Bankers Achieve Vital Changes to Accounting Rules

It took years of hard work, but community bankers once again showed they can make a positive impact on new regulations through engaged grassroots advocacy. The latest industry success came with the release of the Financial Accounting Standards Board’s final updated standard on credit losses.

This Current Expected Credit Loss standard is by no means perfect, requiring all banks to account for credit losses at the point of origination. But community bankers and ICBA have singlehandedly achieved numerous and important revisions to the standard that will make it more workable for Main Street institutions and avoid potentially disastrous consequences for our industry.

Key Concessions

Compared with what was originally proposed, FASB has completely departed from a standard that would have required complex modeling systems for institutions large and small. Instead, it now explicitly allows community banks to continue using their personal understanding of local markets to determine loan-loss reserves. That means community banks will be able to continue using qualitative factors, historical losses and spreadsheets to calculate their loan-loss reserves when the standard is implemented in 2020-21.

Federal regulators showed they are on board with this approach, announcing in formal guidance that community banks will be able to meet the new standards without complex models or third-party service providers. This is complete reversal from a year ago, when a regulator-led webinar suggested banks should consider investing in third-party modeling systems.

Years of Outreach

Why the change of heart? It’s due entirely to the tenacity of community bankers, our affiliated state associations, and ICBA, the only national trade association that stood up exclusively for our industry. ICBA led grassroots outreach on the standard since it was introduced nearly six years ago—including a 2011 petition signed by roughly 5,000 bankers. Meanwhile, ICBA community bankers have worked directly with FASB to explain the unique community bank business model, resulting in these important changes.

ICBA community bankers Greg Ohlendorf, Lucas White and Tim Zimmerman deserve special congratulations and thanks for their efforts. All three volunteered hundreds of hours of their precious time to work with FASB and communicate community banker concerns. Most recently, Zimmerman, ICBA’s vice chairman, has served as the sole community bank representative on FASB’s Transition Resource Group. The TRG will continue to play a key role in assuring the standard is implemented as intended, with the much-needed industry-advocated improvements.

Real-World Impact

The impact of these changes cannot be overstated. As originally proposed, FASB’s impairment proposal would have crippled community banks and their ability to serve local communities across the nation. Now, community banks will be able to continue accounting for loan losses in a more scalable manner, using their own systems and first-hand knowledge of their local customers and communities.

Indeed, the evolution of the CECL standard warrants congratulations all around. These changes simply could not have been achieved without the input of an entire industry of community bankers. Hats off to my community bank colleagues from coast to coast for fighting this important battle and accomplishing so much.

FASB Fabrications Show Genuine Disconnect with Reality

Some might be surprised to learn that I’ve encountered circumstances so unbelievable I’ve been left speechless (hard to believe, I know), but last Thursday was one of those times. After years of meeting with the Financial Accounting Standards Board (FASB) to raise concerns about the harmful impact of its proposed accounting reforms on community banks, I was astonished to find that no one at FASB has listened to a single word we’ve said. In a recent speech, FASB Chairman Russell Golden had the gall to not only dismiss community bank concerns with the proposal, but also to implicate Main Street banks in the Wall Street financial crisis!

In addition to misrepresenting his organization’s proposal and what it will mean for local lenders (more on that later), Golden said that bank failures following the crisis show that community banks were a “major part of the problem.” I was so struck by this outright fabrication—this slander against the hardworking Americans who pulled our economy out of Wall Street’s toilet—that I was at a complete loss for words, for about a minute. Then it came time to respond and call these remarks out for what they are: a cynical and ahistorical justification of shoddy policies by an organization that refuses to acknowledge its own mistakes.

As ICBA noted this week in a letter from our entire Executive Committee, the truth is that the vast majority of community banks fared extremely well during the Wall Street crisis because of their personalized, relationship-based business model—the very model that FASB accounting reforms completely contradict. While too-big-to-fail banks developed irresponsible financial instruments that incentivized disastrous risk-taking and then survived on taxpayer assistance after wrecking the economy, community banks continued their business of meeting face-to-face with their customers and providing badly needed credit. Blaming community banks for the crisis is like blaming Poland for World War II. It shows either a misunderstanding of our financial system, a disdain for local financial institutions, or a selective historical view that one might expect at a lower Manhattan cocktail lounge—not the nation’s financial accounting standards-setter.

Adding insult to injury, Golden also flatly disavows the cost and complexity inherent in FASB’s proposed Current Expected Credit Loss model (CECL). In fact, the CECL plan requires banks of all sizes to record a provision for credit losses the moment they make a loan, mandating expensive credit modeling systems that will crush the localized financial decision-making that is fundamental to community bank lending. Further, Golden downplayed the strict regulatory requirements the new standards will necessitate, showing a clear disconnect with regulators that have already launched webinars on the plan and have predicted a resulting 30 to 50 percent hike in loan-loss reserves.

This financial accounting doublespeak demonstrates a callous disregard for ICBA’s repeated attempts to make FASB’s plan work for community banks—including numerous meetings, our alternative proposal based on historical losses, and the nearly 5,000 community bankers who signed ICBA’s petition advocating the alternative model. If FASB continues to ignore the community banking industry’s calls for reform, the damage to our industry, the American consumer, and local economies will be irreparable. Golden’s temerity might have left me momentarily speechless, but it’s only going to turn up the volume of our opposition to this costly, burdensome and economically catastrophic plan.

Loan-Loss Plan Is Direct Hit on Community Bank Lending

The following op-ed originally appeared Nov. 9 on American Banker’s BankThink blog.

It is no wonder that the banking industry strongly opposes the Financial Accounting Standards Board’s proposed reforms to loan-loan loss reserve calculations. The proposal would force community banks, in particular, to completely overhaul their approach to lending. Even some FASB members and more than half of the board’s own Investor Advisory Committee oppose it as well.

The proposal would revamp how banks recognize credit losses on all types of loans. Because community banks follow generally accepted accounting principles — known as GAAP — they normally record a provision for credit losses when they actually have evidence they’ll incur a default. But under the FASB plan, known as the Current Expected Credit Loss model, banks of all sizes would instead take a hit the moment they make a loan. Banks would be required to estimate expected credit losses for the life of a financial instrument and recognize the net present value of those losses at the moment of origination.

This is flawed accounting and antithetical to the community banking model itself. Requiring local institutions to institute and maintain complex and expensive credit modeling systems removes their discretion to make localized financial decisions. Pushing up loan losses in the credit-loss cycle to the point of origination also effectively penalizes community banks for investing in loans, which are made predominantly to individuals and small businesses in their local communities.

This will restrict the flow of credit from banks of all kinds. Tying up more capital in loan-loss allowances will mean lower regulatory capital, fewer loans to consumers and even tighter economic growth. 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, which translates into a decline in bank capital to support local lending.

So, the FASB proposal has problems. What can we do about it? Can we address concerns over recognizing credit losses without damaging the community bank business model? Fortunately, community banks are still in the business of finding solutions. To borrow from John Adams, we want to have a better hand at building up than pulling down, which is why we’ve come up with an alternative proposal.

The ICBA’s alternative plan for institutions with less than $10 billion would base loan-loss provisions on historical losses for similar assets. Expected losses on financial assets that have not incurred losses would be based on the entity’s own historical loss experience for identical or similar assets. If the institution does not have historical data, it could base expected losses on the experience of a representative peer group. If a loan or security became impaired and a loss was probable, institutions would be allowed to increase the reserve based on a specific measurement of impairment.

This plan would build necessary allowances for potential losses and match each loan’s credit risk with its earning potential. It also would recognize reserves sooner in the credit cycle, which meets FASB’s objective of reforming the shortfalls exposed during the recent credit crisis. Most important, the alternative removes the principle of recognizing losses on day one, reflecting the fact that losses generally occur later in the life of the loan. This would limit the negative impact on community bank lending.

Nearly 5,000 community bankers have signed a petition advocating this simpler approach to financial accounting. The FASB should heed the concerns of community bankers, the rest of the banking industry, and its own board and committee members. Fortunately, we can address concerns with our system of loan-loss provisioning without disrupting community bank lenders and those who depend on them for access to capital.

Digging Deep and Making a Difference This Holiday Season

While many Americans are gearing up for the holiday season, ICBA and community bankers are gearing up for a bustling couple of weeks in Washington. Three top-priority industry initiatives are coming to a head in roughly as many weeks: blocking a backdoor tax hike on Federal Reserve members, modifying a dangerous rewrite of accounting standards, and advancing community bank regulatory relief. We need community bankers nationwide to make their voices heard loud and clear above the din on Capitol Hill.

First off, ICBA is working to ensure that community banks aren’t forced to pay for a federal highway bill that House and Senate lawmakers are in the middle of finalizing. An ICBA-advocated amendment that passed in the House would remove a Senate-passed cut to dividends paid on Federal Reserve Bank stock. The amendment not only drops the $17 billion backdoor charge on community banks, but also removes a provision to extend higher guarantee fees on mortgages sold to Fannie Mae and Freddie Mac. We also want to ensure a separate House-passed amendment that advances several ICBA regulatory relief provisions is included in the final version of the bill.

Meanwhile, ICBA is calling on community bankers to continue leading the charge against a costly accounting revamp that is expected to be finalized by the Financial Accounting Standards Board as soon as next week. The Current Expected Credit Loss model would require banks of all sizes to set aside reserves the day they make a loan or investment, resulting in an increase in loan-loss reserves of up to 50 percent, according to the Office of the Comptroller of the Currency. We’re calling on community bankers nationwide to contact FASB and advocate ICBA’s alternative plan, which would base community bank loan-loss provisions on historical losses. Meanwhile, I encourage community bankers to attend ICBA’s complimentary audio conference on the FASB proposal on Monday, Nov. 30.

Last but not least, ICBA is making a major push to advance our Plan for Prosperity regulatory relief priorities all the way through Congress before lawmakers break in December. Because the House has already passed numerous ICBA-advocated measures, such as relief from new mortgage rules and Basel III, the Senate is the key to getting them over the finish line. Whether it’s using the appropriations process ahead of the Dec. 11 budget deadline or old-fashioned regular order, now is the time for us to pull out all the stops.

The rest of the country might be cleaning out their ovens to cook Thanksgiving dinner, but it’s time for ICBA and community bankers to strike while the iron is hot. Community bankers have sent 15,000 letters to Capitol Hill against the Fed dividend cut and for our regulatory relief proposals, and nearly 5,000 signed ICBA’s petition on FASB’s accounting plan—clearly demonstrating our industry’s ability to rally when it matters most. So while we’re making room for turkey and stuffing, let’s all dig deep and redouble our advocacy efforts. With strong collective action, we can ensure a lasting holiday gift to Main Street communities.