Our Position

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.

  • ICBA has supported FASB’s previous decisions to delay implementation of CECL for non-publicly traded community banks but now believes that banks that are not yet required to adopt CECL should be exempt from CECL adoption permanently.

  • ICBA supports legislation that would stop the implementation of CECL pending study of the impact of the new standard on lending trends in underserved communities.

  • Regulators should continue to supply small community banks with clear, practical, and easy-to-implement methodologies for calculating the periodic provision for estimated credit losses. These methodologies should allow for the seamless incorporation of 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 incorporated into agency guidance on prudent credit risk management.

  • ICBA recommends caution and due skepticism in the consideration of third-party vendor solutions. External loan loss estimation methodologies and data stores should be considered only when the size and scale of loan operations warrant such an alternative.

  • ICBA supports regulatory capital relief for community banks as they adopt CECL in the form of a phased implementation of the cumulative effect adjustment on the opening balance of retained earnings.

Background

ICBA opposes any impairment model for portfolio loans and investment securities that would increase costs and regulatory burdens for small community banks. The initial version of FASB’s CECL model would have required small community banks to use complex cash flow modeling to generate expected losses over the life of the loan or security.

Such modeling would have required 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, though many details surrounding appropriate techniques for estimation of future losses have yet to be determined.

ICBA supports the agency rule that allows a three-year phased implementation of CECL as it impacts common equity tier 1 capital on the date that a bank adopts CECL. ICBA had requested that the phase-in period be extended to five years to allow for unforeseen economic conditions that could introduce stress into community bank capital balances.

For this reason, ICBA also supports recent amendments to the standard to delay implementation for smaller community banks as well as legislative proposals to delay the standard’s implementation until its impact on underserved communities can be studied. In particular, ICBA is concerned that in difficult economic conditions large financial firms could severely curtail lending offerings to subprime borrowers in order to limit the impact on the allowance for credit losses in the financial statements.

ICBA has long supported FASB’s CECL delays that allow most community banks to defer CECL until 2023. However, ICBA believes that the costs and implementation burdens of adopting CECL for smaller community banks outweigh any benefits that would be realized through such adoption. Therefore, the community banks that are currently not required to adopt CECL until 2023 should be permitted to continue with the current incurred loss methodology for measuring credit losses indefinitely. These banks represent all privately held institutions and SEC filers that are not large accelerated filers or accelerated filers. If FASB is unwilling to indefinitely suspend CECL for these banks and their bank holding companies, FASB should further delay the implementation of CECL for these banks until 2025 to allow for more time to consider adoption.

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 position that small community banks should not be required 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. Only community banks that have thoroughly studied and investigated third-party CECL vendor solutions should consider using those approaches as an alternative to internally generated forecasting solutions.

“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

Staff Contact

James Kendrick

First Vice President, Accounting and Capital Policy

Washington, DC

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