Current Expected Credit Loss Model

Position

  • ICBA opposes any implementation of the current expected credit loss (CECL) model for small community bank loans and investment securities by the banking regulators that contradicts the view of the FASB that smaller community financial institutions should utilize existing processes to project future credit losses when providing for the loan loss provision.
  • Regulators should supply small community banks with clear, practical, and easy-to-implement methodologies for calculating the periodic provision for estimated credit losses that allows for the seamless incorporation of their existing processes.
  • For community banks that do introduce modeling into their loan loss provisioning processes, inputs to models should be community or transaction specific and not based on more global economic factors that may be difficult to source, maintain, or apply in a practical manner.
  • Examination processes related to model validation and process management should be published for public comment and be incorporated into agency guidance on prudent credit risk management.

Background

ICBA opposes any regulator-driven impairment model for portfolio loans and investment securities that increases costs and regulatory burdens for small community banks. During the due process phase of FASB’s current expected loss model (CECL), small community banks were expected to introduce complex cash flow modeling processes that included non-loan-specific factors to generate expected losses over the life of the loan or security. This would have required small community banks to dedicate valuable resources to model selection, testing, production, and maintenance in addition to extensive data sourcing, warehousing, and administration. This expenditure of resources would have limited community banks’ potential for loan growth and constricted economic expansion in local communities.

Fortunately, in its final version of the standard, FASB determined that smaller institutions should be allowed to utilize existing processes to project future credit losses. These include spreadsheets, narratives, and other noncomplex estimation efforts. Bank regulators have expressed a willingness to accept forward projections of future losses using these existing tools and process as well. However, implementation of the final standard does not start until 2020 or later and many details surrounding appropriate techniques for estimation of future losses have yet to be determined. It is imperative that ICBA and community banks play an active role in the implementation of the final standard to ensure regulators honor FASB’s view of it and do not require small community banks to implement complex modeling techniques.

For larger community banks and those that choose to adopt a cash flow modeling approach, modeling inputs should not be more difficult to source, maintain, and apply than is warranted by the underlying risks being identified and measured. “Best practices” with regard to model inputs that may be appropriate for larger institutions must not become de facto requirements for community banks. Finally, regulators must be transparent in their assessment of community bank credit risk management processes. They should publish formal proposed guidance for comment that allows community banks of all sizes to meet examiner expectations for sound risk management policy.

Staff Contact: James Kendrick