Accounting About-Face

Speaking Out—ICBA Chairman Rebeca Romero Rainey (far left) testified in June before the U.S. Senate Banking Committee. She explained why lawmakers should exempt community banks from Basel III capital rule.
Speaking Out—ICBA Chairman Rebeca Romero Rainey (far left) testified in June before the U.S. Senate Banking Committee. She explained why lawmakers should exempt community banks from Basel III capital rule.

Community bankers score big changes in final credit-loss standard

By James Kendrick

After nearly six years of active grassroots advocacy, community bankers achieved important changes to new accounting standards with the Financial Accounting Standards Board’s final update on credit losses. Although the Current Expected Credit Loss standard isn’t perfect, it does include many revisions that will make it more workable for community banks and avoid harmful consequences for the industry.

Concessions stand
FASB’s final CECL standard, which requires banks to account for credit losses at the point of loan origination, is a complete departure from its original proposal. Instead of requiring complex modeling systems for institutions of all sizes, it now explicitly allows community banks to continue using their personal understanding of local markets to determine loan-loss reserves. That means community banks will be able to continue using qualitative factors, historical losses and spreadsheets to calculate their reserves when the standard is implemented in 2020—21.

To their credit, federal regulators have already showed they are on board with the approach laid out in FASB’s final standard. The agencies said in formal guidance that community banks will be able to meet the new standards without complex models or third-party service providers. This is a complete reversal from just a year ago, when a regulator-led webinar suggested banks should consider investing in third-party modeling systems.

The positive effect of these improvements on the CECL standard cannot be overstated. As originally proposed, FASB’s impairment proposal would have had disastrous consequences on the ability of community banks to serve local communities across the nation. Now, community banks will be able to continue accounting for loan losses in a more scalable manner, using their own systems and firsthand knowledge of their local customers and community.

Grassroots gains
The about-face by FASB and the regulators is due entirely to the grassroots outreach of community bankers, state community banking associations, and ICBA—the only national trade association that stood up exclusively for community banks. As part of ICBA’s grassroots efforts, the association wrote letters to FASB, roughly 5,000 bankers signed a 2011 petition, and ICBA representatives attended several meetings at the board’s
Connecticut headquarters.

Meanwhile, community bankers have worked directly with FASB to explain the unique community bank business model. In particular, ICBA community bankers Greg Ohlendorf, Lucas White and Tim Zimmerman deserve special recognition and gratitude. All three volunteered hundreds of hours of their time to work with FASB on the standard and communicate community banker concerns.

Most recently, Zimmerman, ICBA’s vice chairman, served as the sole community bank representative on FASB’s Transition Resource Group. The TRG will continue to play an important role in assuring the standard is implemented as intended, with ICBA-advocated improvements incorporated into the CECL regulations.

Of course, the evolution of the CECL standard would not have been possible without the active input of an entire industry of community bankers. ICBA and the community banking industry will have to continue working closely with the regulatory agencies as the FASB standard is implemented. But for now community bankers can take heed that they have accomplished yet another policy victory through hard and diligent work.

Congratulations to you all.

James Kendrick
is ICBA’s vice president of accounting and capital policy.

Learn More

More information about the Financial Accounting Standards Board’s new accounting standard, including frequently asked questions, is available online at