As previously reported, proposed FASB Changes for Financial Instruments Related to Credit Losses – otherwise known as the Current Expected Credit Loss (CECL) model initiative – are expected to be released in the first quarter of 2016. As proposed, CECL will require banks to forecast loan losses using “forward-looking information,” replacing the current historical loss and incurred loss models. This change will require banks to book an allowance for the loan from the day of origination throughout the life of the loan – referred to as the “lifetime expected loss estimate.” This creates an immediate day one loss that penalizes community banks for investing in loans and certain securities. Adding to that complexity, each loan’s lifetime expected loss estimate would have to be adjusted every quarter.
We encourage you to read the information available on the ICBA “Be Heard” resource page and not underestimate the impact this change will have on your bank. The Office of the Comptroller of the Currency estimates this change will result in loan loss reserves increasing 30-50% “…with some banks experiencing higher increases.” The unnecessary and costly “hoops” to calculate the ALLL under CECL will also create additional burdens on community banks. While this change is proposed by FASB, an independent organization promoting accounting standards, the primary regulators are reported to be “fully supportive” of this initiative. The ultimate impact on community banks will be in large part dependent upon the implementation of this accounting standard by the regulators.
IBAT has been engaged in this issue for more than two years, and in addition to a comment letter to FASB, we have taken every opportunity with the federal regulatory authorities to express our serious concerns.
Both IBAT and ICBA continue to push for a reversal on this proposed plan, or at the very least a “right sized” carve out for community banks. We urge you to use the “Be Heard” resource page to send a letter to FASB opposing CECL. IBAT also encourages you to reach out to your primary federal regulator to express your opposition to yet another backdoor assault on community banking.
As stated in the IBAT comment letter, “Sadly, much like the original Basel III capital proposal, the credit loss proposal now under consideration reflects an ongoing disconnect between the regulatory entities and the reality of Main Street community banking.” Or, as an IBAT member eloquently stated, “Enough is enough!”