Pub. 3 2015 Issue 3

17 Fall 2015 The Community Banker Fine Points MISGUIDED GUIDANCE By Camden Fine, President and CEO of ICBA Read the Plan ICBA’s alternative to the Financial Account Standards Board’s proposed expected credit-loss accounting guid- ance is online at www.icba.org/creditlosses. Y ea or nay, either support or oppose. Sometimes advocating in Washington seems to involve a roll call of those binary choices. But often effective advocacy involves a third option that provides constructive alternatives to poor proposals, particularly those trying to address commonly recognized concerns. For more than three years ICBA and community bankers have been heavily involved in the third advocacy approach to repair the Financial Accounting Standards Board’s proposed guidance to impose a new expected-loss credit impairment accounting model. The final FASB Accounting Standards Up- date, which would broadly ap- ply the new impairment model to all community banks under GAAP principles, is expected to be released by year’s end. Unfortunately, if FASB adopts the proposed standard without the critical changes ICBA and community bankers have advo- cated, the guidance will impose terribly costly and unwieldy accounting burdens that will unnecessarily harm community banks and, by direct extension, local economies. Developed in response to claims that loan-loss reserves at the largest Wall Street institu- tions proved inadequate during the last financial crisis, the FASB guidance would force every community bank to adopt a single megabank approach for recognizing credit losses sooner in the credit cycle. While most community banks agree with FASB that recognizing credit losses sooner will help cushion against economic downturns, the current guidance FASB has proposed is highly impractical for community banks. Unless FASB changes course, community banks will be re- quired to estimate credit losses for every loan and recognize the net present value of those estimated losses at origination. As a result, the guidance would immediately impose financial statement losses when loans are first originated or acquired— theoretical losses that most likely would never materialize. And in addition to imposing overly complex and costly credit modeling methods that com- munity banks could not afford, the guidance would severely and unnecessarily reduce com- munity banks’ capital, earnings and valuations. Backed by thousands of com- munity bankers and 41 state banking associations, ICBA has repeatedly explained to FASB how community banks and local economies would be seriously harmed by the currently pro- posed standard. Just as import- ant, while asking FASB to ex- empt financial institutions with $10 billion or less in assets from its guidance, we have offered a more feasible alternative. To achieve FASB’s objectives, ICBA has proposed allowing community banks to rely on historical credit losses to build their loan-loss reserves. Our alternative would base loan- loss calculations on a specific measurement of impairment that would more accurately reflect credit risks inherent to nonperforming financial instruments. Using these real-world calculations, com- munity banks could also easily manage—and investors could more easily comprehend—their loan-loss reserves without relying on complex, time-con- suming and highly theoretical software modeling. Please stay alert and be ready to respond to this accounting guidance! Time will tell whether FASB changes its course. But ICBA and community banks must be ready to take our reasonable case and practical policy alternatives to regulators and, if necessary, to Congress. We have proven time and again that we can handle almost any challenge when we stand together. On this issue, offering a third way to a much more ef- fective alternative, we can once again ensure common sense wins out in Washington.