Fine Points


Fixing FASB’s impairment proposal

By Camden Fine

For once, it’s not regulators or lawmakers pushing a policy proposal that would impose financial chaos on community banks and Main Street. This time, it’s accountants.

Every community banker should be aware of and very concerned about a new accounting proposal from the Financial Accounting Standards Board. The new FASB proposal would impose a radically different “expected loss” impairment model on banks calculating losses from loans and investment securities for their financial statements. Similar to last year’s Basel III and Volcker Rule proposals, FASB’s proposal presents a clear and present danger to community banks. The proposal is in response to claims that loan-loss reserves at the largest financial firms proved inadequate during the last credit crisis. However, this theoretical new accounting method would simply be incompatible with the realities of community bank lending and portfolio management.

By heavily front-loading anticipated losses, without considering the true evolution of losses realized throughout the credit cycle, the practical effect of FASB’s proposal would be to depress earnings and valuations severely, without regard to the actual credit quality of community bank portfolios. It would unnecessarily impose immediate balance sheet losses that would not actually materialize for years, if ever. Just as damaging, it would also penalize community banks for achieving strong loan growth, the very activity our nation needs to encourage. Additionally, the complex modeling techniques that FASB’s new approach would require will generate further onerous costs and burdens.

All in all, FASB’s proposal would bring financial mayhem to community banks and Main Street.

However, all is far from lost. While formally asking FASB to exempt financial institutions with consolidated assets of $10 billion or less from its proposal, ICBA has also offered a more workable alternative. To achieve FASB’s accounting objectives, ICBA’s proposal would allow community banks to rely on historical losses to build their loan-loss reserves. Our proposal would base loan-loss calculations on a specific measurement of impairment that coincides with the credit risks inherent to the nonperforming financial instrument. Under this calculation, community banks could also easily manage—and investors could more easily apprehend—their loan-loss reserves without relying on overly complex software modeling.

Fortunately, FASB is listening. ICBA has been working with the board for more than a year on this issue, and the board is conscientiously considering our alternative proposal, which is supported by 41 state banking associations. So our alternative, like other successes community banks have had with influencing FASB proposals, has a strong chance of prevailing.

But, as you can anticipate from me by now, convincing FASB to adopt our industry’s alternative proposal, no matter how sensible and constructive it might be, likely won’t happen without the help of community bankers throughout the country. You and your board of directors must speak out. Check out ICBA’s advocacy Web page at for more details, and then write FASB as soon as possible, explaining how our industry’s alternative is much better for your community bank. Then carefully follow the issue for new developments and alerts.

Yes, fixing FASB’s flawed accounting proposal is yet another critical issue our industry must confront. But we’ve proven we can handle almost any challenge when we stand together. We’ve been at the table. Let’s follow through and ensure common sense wins out again.

Reach Camden R. Fine at