The Impact of FASB’s CECL Model on Community Banks

Tomorrow, Feb. 4, the Financial Accounting Standards Board (FASB) will host a meeting at its offices in Connecticut to discuss the impending release of the current expected credit loss (CECL) model. CECL is a complicated methodology intended to calculate future expected losses on each loan booked by a financial institution. It will require the collection and maintenance of data heretofore not collected. Tomorrow’s meeting will be attended by representatives of the Independent Community Bankers of America, the American Bankers Association, all of the federal regulators, and independent bank auditors from several accounting firms. FASB will be represented by its full board of directors and likely several staff members. This meeting is extremely important for bankers, particularly for community bankers.

FASB seemingly is of the opinion that the recent financial crisis could have been avoided had CECL been in place. The reality is that CECL would have had only a miniscule, if any, effect on the financial crisis. The model appears to be based on the premise that collecting and analyzing additional data, and creating a model to run that data through, will solve all problems with the establishment of the allowance for loan and lease losses (ALLL). What FASB is overlooking is that economic forecasts are rarely accurate, and CECL is based in part on forecasts.

As a banker friend put it, FASB has become a renegade organization that is accountable to no one. It seems to have given little thought as to how CECL will negatively affect the smaller end of the banking industry. Small banks already are being sold every business day of the year, with no new banks being formed to replace them. CECL will be the last straw on the camel’s back for many of the remaining small banks, which will be driven to seek merger partners. The massive amount of regulatory burden cast upon these banks is immense, but this new effort to force lenders to comply with CECL is particularly hard to accept. Bankers can vote for or against elected officials, who enact the laws that allow regulators to draft the rules. However the FASB board is not elected by any public process, yet it can impose its will upon the financial services industry.

I have often written about the uniqueness of the delivery of financial services in this country compared to the rest of the world. We have financial services providers of all sizes and charter types, which bring a variety of business models to consumers, businesses and governmental entities. Independently owned and operated, our banks focus their efforts on their customer bases. By contrast, the rest of the world operates with a few large banks, often owned in part by the government. I struggle to understand why our legislative, regulatory and FASB-like entities continue to impose requirements which force out those smaller financial institutions that deliver the local services that help make our system unique … and our country the greatest economic engine ever on earth.

The other perplexing aspect of the CECL issue is that the ALLL system is an accounting creation intended to focus on an institution’s readiness to cover losses. However, as the financial crisis revealed, the ALLL is nothing more than an accounting exercise. Additionally the crisis reminded us that what truly matters for a financial institution to survive financial turmoil is the amount of capital the institution has. Capital is the real ALLL.

FASB is issuing CECL as a new ALLL calculation methodology that will adjust a previously created system of loss recognition that ignores the fact that capital is the only true measure of an institution’s ability to weather a bad economy. FASB should be pleased with the growth of capital in the financial services industry since the financial crisis. Instead it is unleashing a system that threatens the landscape of our unique financial services delivery system and the economic foundation of our nation.

The ray of hope for tomorrow’s meeting is that, in addition to attendance by ABA and ICBA staff, a number of community bankers also have been invited. Among those are Lucas White of The Fountain Trust Company, Covington, Indiana. White is an insightful community banker who serves as vice chairman of the ICBA Lending Committee. He also is a past member of the IBA board of directors and past president of the IBA Future Leadership Division. The Indiana banking community appreciates Mr. White’s leadership and wishes him well in this impactful meeting.

– S. Joe DeHaven

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