All it takes to bridge the divide between banks and credit unions — and lawmakers on opposite ends of the political spectrum — is a controversial accounting change that threatens to harm members of both industries.
In a rare example of cooperation, banking and credit union trade groups are working together to push back against a FASB plan that would dramatically alter when financial institutions set aside funds to reserve against loan losses. The joint effort has already convinced a bipartisan group of legislators to endorse a letter urging FASB to reconsider its planned Current Expected Credit Loss standard, or CECL.
Bank and credit union advocates have called the proposal one of the biggest accounting changes ever put forward. While lawmakers refrained from referring to CECL that way, they still made that there is considerable concern about a plan to force financial institutions to set up reserves when a loan is originated, rather than waiting for an adverse event to take place.
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The American Bankers Association has gone public with its issues with a plan to require banks to record loan-loss provisions when they originate a loan. Bankers are worried that the rule will eventually force smaller institutions to use costly modeling programs to comply.
January 22 -
The Current Expected Loss Credit model will help to quantify bankers' intuition and can be built with readily available data.
January 20 -
A long-expected change to the rules for provisioning against bad loans is coming soon, and opponents are going on the offensive, arguing that it is impractical and would be especially hard for small banks to comply with. But few concessions, if any, are predicted.
September 29
"CECL has the potential to irreversibly damage community banks' and credit unions' ability to continue to adequately serve their customers and communities and sustain the economic recovery," lawmakers wrote. The trade groups worked with Rep. Scott Tipton, R-Colo., and Rep. Patrick Murphy, D-Fla., in drafting the letter, which was released a week in advance of a
In all, 62 members of the House of Representatives signed the two-page letter, which was released Friday and addressed to FASB Chairman Russell Golden. It asks the accounting group to weigh the impact CECL might have on credit availability, consider what they termed "more practical" alternatives, and think about a two-tiered implementation system.
Brian Cooney, a senior vice president and legislative counsel at the Independent Community Bankers of America, said that 45 of the signatories are Republican, while the rest are Democrats. Also, 26 members of the 60-member House Financial Service Committee signed the letter.
FASB spokeswoman Christine Klimek said in a statement Tuesday that the board was studying the letter closely. "As with all stakeholder feedback, we will carefully consider the input we receive from Congress on the upcoming standard," she said.
FASB had intended to officially issue the new CECL standard in December, but the date has been pushed back indefinitely. FASB's full board is set to meet Thursday at the group's headquarters in Norwalk, Conn., with community bankers, credit union executives, auditors and regulators.
CECL's critics have never had the opportunity to directly address FASB's seven-member board, James Kendrick, the ICBA's vice president for accounting and capital policy, said Tuesday. "There's been a lot of outreach, but never before the full board," he said.
On Monday, Dan Berger, president and CEO of the National Association of Federal Credit Unions, released a letter to Golden asking to meet with the board to discuss credit union and accounting issues. He also called on FASB to delay its tentative implementation dates for CECL by a year.
As things stand now, publicly traded institutions would become subject to FASB in December 2018. Privately traded institutions and credit unions would fall under its requirements a year later.
Executives at banks and credit unions worry CECL would force institutions of all sizes to employ complex and expensive modeling software to calculate the early stage loan-loss projections required under CECL. They also fear that the proposal would result in substantially higher loan-loss reserves that could put added strain on capital ratios.
The ICBA has estimated that could result in a 30% to 50% increase in community banks' loan loss reserves.
Those fears were on display Sunday, when Steven Hovde, president and CEO of Hovde Group in Chicago, said that one of the community banks in which his company holds a stake is looking at raising $7 million solely to account for CECL's potential impact on its balance sheet. Speaking at a conference in Phoenix hosted by Bank Director magazine, he expressed frustration that FASB was considering a standard "that would result in a reduction to capital as the economy sits on the brink of a recession."
Banks and credit unions aren't the only ones bracing for CECL's potential impact.
Edward Face, commissioner of Virginia's Bureau of Financial Institutions, said CECL would "impose significant transitional costs on depository institutions." Virginia regulators "recognize that the current incurred loss impairment model has its shortcomings," Face said, though he added that he hopes its replacement does not push too far too fast.
"We should not strive for a framework that introduces radical change," Face said. "Rather, we should seek a framework that entails practical improvements over existing methods."
FASB decided to revamp the loan-loss process in the aftermath of the financial crisis after a commission established by the group cited "delayed recognition of losses related to loans" as a key weakness. CECL addresses the problem by requiring provisioning much earlier in a loan's life cycle by requiring lenders to estimate a loss — defined as the cash flow an institution does not expect to collect — on the same day that a loan is booked.
FASB officials have repeatedly stressed that the standard does not mandate any particular method or model to arrive at an estimate, and Face said he is hopeful regulators will implement rules "in a manner consistent with their commendable objectives to reduce regulatory reporting burden for small and noncomplex banks."
Lawmakers in their letter to FASB echoed the concerns expressed by bankers and credit union executives, cautioning that "a requirement that lenders use complex theoretical forecasting models, determining each loan's probability of failure based on a wide range of economic factors, is costly and time consuming."
Ryan Donovan, chief advocacy officer at the Credit Union National Association, said credit unions and banks have collaborated before, usually on issues tied to regulatory relief and compliance. Given the stakes involved with CECL, Donovan said his group was eager to help the ICBA collect lawmakers' signatures.
"I know this is on the minds of credit unions and community bank leaders," Donovan said. "I hope FASB will take their concerns into consideration as it moves forward."
The ICBA's Cooney said his trade group worked closely with CUNA and NAFCU.
"It was a very collaborative effort," Cooney said. "I'm very happy with the result. You have to look at the timing. This really didn't start coming together until mid-December."
