Study Affirms Community Banks’ Small-Biz Leadership

It’s something ICBA and the community banking industry say all the time: community banks are the nation’s leading small-business lenders. And the numbers back it up. While community banks make up less than 20 percent of the banking system’s assets, they dole out more than half of its small-business loans.

Still, some small businesses continue to test their alternatives: megabanks, credit unions, and now online lenders. The latest set of numbers shows that these businesses should stick with a community bank.

According to a new study from seven Federal Reserve Banks, small businesses that apply for loans with community banks are the most successful and most satisfied.

Here’s what the study found:

• Community banks were the most likely to make a loan, extending financing to 76 percent of loan applicants while large banks approved just 58 percent.
• Community banks also had the highest satisfaction scores, with 75 percent reporting that they were satisfied with their overall experience, compared with scores of 56 percent for credit unions and 51 percent for large banks.
• While online lenders had the second-highest rate of approval at 71 percent, just 15 percent of borrowers said they were satisfied with the experience.
• Of the firms that were dissatisfied with their experience with online lenders, 70 percent cited high interest rates and 51 percent reported unfavorable repayment terms.

With the amount of blood, sweat and tears that goes into launching a startup or expanding a small business, entrepreneurs should know that they have a partner in their local community bank. That is more important now than ever before, as demonstrated in a 2014 ICBA study that found that 41 percent of Millennials say they are very interested in starting up their own business.

So community bankers, let’s continue to spread the word about the importance of our industry in getting small businesses off the ground and taking our economy along with them. It’s an important message that everyone needs to hear, and now we have even more data to back it up.

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.

Regulatory Burden Is Capturing Big Headlines

While ICBA continues our full-court press toward advancing community bank regulatory relief all the way through Congress and to the president’s desk, we are also making noticeable headway in raising public awareness of the problem via the national news media. The Washington Times recently ran a special section featuring a series of articles, editorials and ICBA op-eds on community bank overregulation and the association’s proposals to address the issue.

Titled “How Excessive Regulation is Crushing Main Street: The Inside Story on the Squeeze Facing the Nation’s Community Banks,” the special section includes comprehensive coverage of the dangers of a one-size-fits-all approach to regulation and the resulting impact on consumers and local communities. It also spotlights specific areas of concern for our industry, such as Operation Choke Point, the call report, credit union oversight, barriers to de novo charters and cybersecurity rules.

The Washington Times feature complements ICBA’s ongoing, aggressive strategies to raise awareness in Washington and nationwide of the regulatory challenges facing community banks and what it means for our Main Street economy. I strongly recommend that community bankers—and anyone else concerned about the impact of red tape on American jobs and communities—read this important series and share it with your lawmakers to demonstrate the critical need for congressional action on which Main Street is depending.