James Kendrick: Accounting accountability

Rep. Blaine Luetkemeyer (R-Mo.) introduced legislation at the end of last year to block the CECL standard. Bill Clark/CQ Roll Call/Getty Images

Our years-long effort on the CECL standard has gained new traction.

By James Kendrick, ICBA

A longtime community bank advocacy campaign has recently received new life, offering opportunities to expand on gains achieved over several years of outreach. With the Financial Accounting Standards Board’s (FASB) Current Expected Credit Loss (CECL) 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, Rep. Blaine Luetkemeyer (R-Mo.), chair of the Financial Institution and Consumer Credit subcommittee, introduced legislation during the last Congress to block the standard. Meanwhile, 28 House members called on Treasury secretary Steven 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.

Quick stat


community bankers signed an ICBA petition to the Financial Accounting Standards Board supporting the withdrawal of its CECL plan

ICBA has been meeting with FASB officials since 2011 on post-crisis accounting for financial instruments. In January 2013, FASB proposed a single “expected credit loss” measurement for recognizing credit losses with loss forecasts based on a bank’s estimates of future loss probabilities. ICBA strongly opposed the proposal, noting that it would force community banks to record a provision for credit losses much too early, radically change community bank accounting methods, require complex and expensive modeling systems, sharply increase the cost of lending and constrict the flow of credit.

In response, we introduced our own alternative impairment model in June 2013 that would rely on historical loss experience, place less strain on community banks and better match loss measurements with the economic cycle. Under the proposal, losses would be recognized over the effective life of the financial instrument to better reflect the fact that losses generally occur later in the life of the loan or security. 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—highlighting a real and troubling misconception at the standards-setter. Those comments drew a strong reaction from ICBA, which set the record straight by noting that the financial collapse originated on Wall Street, and that community banks fared well due to the relationship banking model that FASB’s loan-loss proposal directly contradicts. Golden’s comments also drew a significant backlash in Washington, with a bipartisan group of 62 members of Congress echoing ICBA’s concerns with CECL in a joint letter to FASB.

The uproar offered an opening for needed reforms, and ICBA wasted no time in making the most of it. Amid the backlash, ICBA’s calls for a community banker meeting with the full FASB board were granted, and Tim Zimmerman, CEO of Standard Bank in Monroeville, Pa., joined a FASB council on CECL.

This was an important step, because it allowed ICBA to educate FASB on what a community bank really is, correct its misconceptions about the relationship between the Wall Street crisis and Main Street institutions, and change the narrative for good. As a result, FASB was much better prepared to produce an accounting standard that allowed these banks to continue serving their communities.

Ultimately, the board 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.

Speaking out

Throughout the campaign, ICBA has maintained close contact with federal banking regulators, which projected that the initial proposed standard would have required banks to increase their allowances for loan losses by up to 50 percent.

In implementing the revised 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.

James Kendrick (james.kendrick@icba.org) is ICBA first vice president of accounting and capital policy