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Holding CECL Accountable

Years-long ICBA effort gains new traction

By Chris Cole and James Kendrick

A longtime community bank advocacy campaign has lately received new life, offering opportunities to expand on gains achieved over several years of outreach. With the Financial Accounting Standards Board’s Current Expected Credit Loss accounting standard set to begin taking effect next year for publicly held banks, policymakers and others in the banking industry have shown a renewed interest in its impact on the financial sector.

With Republicans and Democrats expressing concerns over CECL as the deadline nears, House Financial Services subcommittee Chairman Blaine Luetkemeyer (R-Mo.) introduced legislation during the last Congress to block the standard. Meanwhile, 28 House members called on Treasury Secretary Steve Mnuchin to work to delay the effective date of the standard, which requires institutions to provide for credit losses the moment they make a loan.

While ICBA continues working to minimize the negative impact of CECL on community banks, we have been instrumental in making significant progress since FASB began proposing an expected-loss impairment model in the wake of the financial crisis.

ICBA has been meeting with FASB officials since 2011 on post-crisis accounting for financial instruments, introducing our own alternative impairment model in June 2013 that would rely on historical loss experience. That December, ICBA delivered a petition with 4,650 signatures urging FASB to withdraw its CECL plan, followed by a letter-writing campaign and roundtable discussion at FASB headquarters the next spring.

We really began making progress in the winter of 2015-2016, when comments from FASB Chairman Russell Golden suggested that community banks contributed to the financial crisis.  Those comments drew a very strong reaction from ICBA and a significant bipartisan backlash in Washington. ICBA calls for a community banker meeting with the full FASB board were granted, ICBA leadership banker Tim Zimmerman joined a FASB council on CECL, and the board ultimately revised the standard to make it more flexible and scalable for community banks. The revised standard confirmed that complex models are not required, calculations using spreadsheets are acceptable, and community banks can use granular local information for forward-looking purposes.

In implementing the plan, regulators have said they don’t expect community banks to need to adopt complex modeling techniques or engage third-party service providers. They also recently finalized a three-year transition period for recognizing the impact on regulatory capital of changes in credit losses due to a bank’s adoption of CECL.

Although much has been accomplished to improve the standard for community banks, ICBA continues to express concerns to the banking regulators and FASB about the transition costs of CECL for community banks. We advocated a five-year transition period rather than a three-year period, and we will continue to urge regulators to include loan-loss reserves as part of tier one capital, particularly once CECL is fully implemented. So while ICBA works to build on our improvements to the CECL standard achieved over years of effort, community banks can take comfort in knowing that our work so far has led to meaningful gains.

Chris Cole is ICBA executive vice president and senior regulatory counsel. James Kendrick is ICBA first vice president of accounting and capital policy.