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Community Bank Petition to the Financial Accounting Foundation and the Financial Accounting Standards Board

Financial Instruments-Credit Losses-Subtopic 825-15

We, the undersigned community bank chief executive officers, presidents, directors, employees, business partners and customers, hereby submit this petition to urge the Financial Accounting Foundation and the Financial Accounting Standards Board to withdraw their accounting standards proposal concerning credit losses (Financial Instruments-Credit Losses-Subtopic 825-15), which would shift the recognition of credit losses from the current incurred loss model to a much more complicated expected loss model. We urge the FAF and FASB to re-propose a simpler and more straightforward proposal that would not harm the nation’s more than 6,500 community banks and Main Street, USA.

We believe the following:

  • Community banks should not be required to front load credit losses when originating portfolio loans.
  • Day one loss recognition on newly originated loans does not follow the natural progression of the credit cycle.
  • Day one loss recognition penalizes community banks for originating prudently underwritten loans in their communities.
  • Any credit loss model that does not consider the unique nature of community bank underwriting and its common sense approach to assessing risk in the local community creates a competitive disadvantage for these institutions.
  • The Office of the Comptroller of the Currency estimates that loan loss reserves on average will increase by 30 – 50% with adoption of the proposed expected credit loss model with the impact on some banks much greater; this radical increase in reserves harms community banks, the local economies they support, and the overall U.S. economy.
  • Community banks do not have the expertise and resources required to engage in the complex and expensive credit loss modeling that would accompany the adoption of the proposed expected loss credit model.
  • Community banks are not prepared to build and maintain the extensive sourcing, warehousing, and administration of the data needed to properly administer a complex modeling framework.
  • A loan loss provisioning model that presents a heavy burden and strains a community bank’s finite resources is unnecessary to ensure that loan loss reserves are adequate and appropriate.
  • Transition to the proposed expected credit loss model would have an immediate adverse impact on common equity tier 1 capital at a time when community banks need to be building up their capital in compliance with the new Basel III capital rules.
  • Subchapter S banks and mutual savings institutions will be disproportionately impacted by the proposal because they rely so heavily on retained earnings to meet regulatory capital minimums, build capital levels and pay dividends.

The Financial Accounting Standards Board should re-propose a simpler, more straightforward credit loss approach for all banks and bank holding companies with total consolidated assets of $10 billion or less. The alternative credit loss model should require a community bank to recognize credit losses ratably over the life of the loan using historical credit losses experienced by the institution or by a peer group. Upon the occurrence of an incurred loss event where the occurrence of a credit loss is probable, the historical credit loss model would be replaced by the incurred loss model for the impaired asset only.

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