FASB Wins Over One Vocal Critic with Revised Loan-Loss Plan

It's time for bankers to declare victory or fight back even harder.

Those are the 180-degree-different responses to the latest version of the Financial Accounting Standards Board's controversial Current Expected Credit Loss standard — it all depends on which trade group you are listening to.

Officials at the Independent Community Bankers of America breathed a huge, and surprising, sigh of relief last week shortly after a FASB panel unveiled updates to the plan. The new draft finally puts to rest fears that banks would have to purchase expensive software and use complex models to calculate loan-loss reserves, ICBA leaders said.

Yet their counterparts at the American Bankers Association remain worried that even in its new-and-improved form, the plan would put enormous data demands on small banks.

Up until now bankers had been fairly unified in opposition to the plan, which by nearly all accounts since its introduction in December 2012 would transform the way financial institutions determine allowances for loan losses.

Many bankers feared its requirement that projected credit losses be recorded at the time a loan is booked will lead to a hefty increase in provisioning requirements. Trade groups for banks and credit unions have devoted huge amounts of time and resources lobbying the FASB and keeping members informed about the debate.

The ICBA had been the most aggressive critic. At a public hearing in February, James Kendrick, the ICBA's vice president for accounting and public policy, clashed with one of the accounting board's members over criticism the ICBA had leveled at FASB Chairman Russell Golden. And in an earlier letter published in American Banker, ICBA Chief Executive Camden R. Fine characterized the plan as "flawed accounting and antithetical to community banking itself."

As recently as March 28, Fine said that it "would hinder community banks' ability to continue meeting the needs of their local customers and communities."

But ICBA officials have softened their rhetoric since the FASB issued the updated version of the CECL plan at a meeting of its Transition Resource Group on April 1. The final rule is expected in June.

In an interview last week, Kendrick credited the FASB with "working to understand the plight of small institutions."

The ICBA is continuing to push for changes, but as things stand now, the FASB has created "a much more scalable standard. …There's been some really big progress. I look forward to keeping that going," Kendrick said.

The latest draft acknowledged that community banks' relationship-based business model and in-depth knowledge of their customers makes it unnecessary to resort to complex modeling, which was feared under earlier versions of the CECL standard, Kendrick said. Moreover, the revisions mean community banks can continue to calculate their loan-loss reserves the way they do today, using qualitative factors, historical losses, and current systems such as spreadsheets and narratives.

"We're a lot happier now than when we went into that [FASB public hearing]," Timothy Zimmerman, the president of the $468 million-asset Standard Financial in Monroeville, Pa., said Monday.

"We felt all along when they were designing the standard" that they were doing so with larger institutions in mind," said Zimmerman, who is also the ICBA's vice chairman. "They started with the most complicated [banks] when they wrote the rule. They didn't necessarily take smaller institutions into account. … If we can get a couple more changes, I think it will be something we can live with."

Officials at the Credit Union National Association, which has worked closely with the ICBA on the issue, agreed the new draft represents progress. "It seems like it will be more manageable for credit unions of all sizes," Luke Martone, CUNA's senior director of advocacy and counsel, said Friday. "We're particularly appreciative [small institutions] won't be required to use complex modeling."

The ABA is taking a much less optimistic view of things.

The FASB's revisions "did not really address what is needed to justify the costs of the new standard on small banks," Michael Gullette, the ABA's vice president for accounting and financial management policy, said in an interview last week.

According to Gullette, the plan's biggest threat to small financial institutions has always come from the potentially massive amounts of data it will require them to collect and how that data must be analyzed for a life-of-loan loss estimate. Nothing in the new draft lessens that threat, Gullette said.

"I've never been concerned about scalability language within CECL because it never required any specific methods in the first place," Gullette said. What it does require is a set of data banks don't currently maintain. [Arriving at loan-loss decisions] is going to take a lot more data and a lot more work."

As things stand, lenders are permitted to accrue a loan-loss reserve after an adverse event leads them to believe a credit has become impaired when the amount of the loss can be reasonably estimated. Under CECL they will be asked to estimate losses over the life of a loan at the time it is booked. It is a sea change that will usher in "a lot more measurement uncertainty," Gullette said. "Adding this life-of-a-loan aspect — this future part — is going to add enormous complexity."

And that might only be the start. Banks and credit unions will have to be able to explain their loan-loss rationales to auditors and regulators, who are going to want to "peel back and figure out how assumptions were arrived at," Gullette said. "Community banks will be required in real life to build and maintain data warehouses to support CECL estimates. Given the large impact small changes in the assumptions will have on a bank's capital, those assumptions can't just come out of nowhere."

Officials at the National Association of Federal Credit Unions have urged the FASB to delay final action and hold an additional comment period to give the public a chance to weigh in on the recent changes.

In a letter to the FASB's Golden, representatives of more than 60 federal credit unions said that "the confusion and lack of transparency surrounding the development of the Current Expected Credit Loss model necessitates the solicitation of additional industry feedback prior to finalization."

Banking regulators are keeping an eye on the matter, too.

Federal Deposit Insurance Corp. Chief Accountant Robert Storch said his agency was working to make implementation of the new standard as smooth as possible. "Banks should be able to build on the existing processes that they have today," Storch said Thursday during an FDIC Advisory Committee meeting in Washington. "There's no desire on the agency's part or on FASB's part to say 'Scrap everything you have today, you need to start from scratch.' "

FASB spokeswoman Christine L. Klimek said in an email to American Banker that the board was pleased with the ICBA's sunnier attitude, but she reiterated its position that the proposal never required banks to adopt complex modeling or expensive new software.

"The FASB was pleased to see ... that the ICBA now understands that smaller community banks will not be required to employ overly complex and expensive models to implement the guidance," Klimek said. "We look forward to continuing to address questions and concerns from all of our stakeholders — including community banks and credit unions — as we move towards issuance of the final standard."

Lalita Clozel contributed to this article.