On February 4, 2016, the Financial Accounting Standards Board (FASB) hosted its first public roundtable session with community bankers, regulators, auditors and banking lobbyists to discuss the implementation of the forthcoming credit impairment standard, commonly called the Current Expected Credit Loss (CECL) model.
The Independent Community Bankers of America (ICBA) and the American Bankers Association (ABA) have been vocal in their opposition to CECL due to the perceived detrimental impact on community banks—most notably increased regulatory capital requirements, greater volatility in loss provisions and reduced lending capacity. The ABA is concerned that community banks without complex financial modeling capacity will be at a competitive disadvantage. Representatives attended from more than a dozen institutions, including community banks (both public and private) and credit unions ranging in size from $145 million to $1.1 billion in assets. Senior officials attended from the Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC), Federal Reserve Bank (Fed), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration, Conference of State Bank Supervisors and the Public Company Accounting Oversight Board (PCAOB).
Overall, the bankers walked away with a better understanding of some of the nuances of the new model, although concerns remain about the standard’s final language and audit costs. The bankers repeatedly stressed the need for meaningful agreement among the SEC, banking regulators, auditors and the PCAOB as to the acceptable level of precision needed to support the increased judgment the new standard requires. The regulators noted the extended implementation date will be critical for their internal training of examiners, especially in light of feedback from bankers on overzealous field personnel. Regulators expressed their commitment to making their supervision of CECL implementation work for community banks.
The final standard is in drafting phase after several fatal flaw reviews and is expected to be issued in the second quarter of 2016. FASB was open to providing additional clarity on the terms “reasonable,” “supportable” and “unreasonable cost and effort” as well as specific examples and illustrations for smaller banks. Attendees urged FASB to consider issuing a third exposure draft to ensure the standard’s language represents FASB’s verbal commitments at the roundtable. FASB was less committed to this idea, noting it’s following its required due process, including a comprehensive cost benefit analysis, before the final vote for issuance. FASB highlighted the active involvement of the CECL transition resource group (TRG) in the fatal flaw review process and drafting revisions. The TRG group is composed of financial statement preparers, auditors and users. Future meetings will offer a public forum with public disclosure to address implementation issues and provide education on FASB’s intent.
Complex Models Not Required
FASB noted the standard doesn’t prescribe a specific modeling technique or loss methodology. Banks can continue using a FAS 114 approach to evaluate individual loans. FASB already is working on educational materials banking regulators may use to help educate field examiners. Joanne Wakim, the Fed’s chief accountant, noted “the Fed is committed to CECL being operationalized in a manner that is simple and practical for community banks.” Examiner training will demonstrate how CECL implementation will differ for community banks and top-tier institutions. “A smaller, less complex bank would require a smaller, less complex methodology,” Wakim said.
FDIC Chief Accountant Robert Storch noted that, with some adjustments, the existing methodologies—including Excel spreadsheets (used by 84 percent of the nation’s community banks)—would be appropriate for many smaller banks. The FDIC won’t require complex models for all the banks it examines. Jeffrey Geer, the OCC’s associate chief accountant, noted his office would “not in any way” require “Monte-Carlo modeling” for every bank.
CECL’s implementation date for public business entities that meet the definition of an SEC filer is 2019. Public business entities not meeting the definition of an SEC filer, and all nonpublic business entities, have until 2020 for implementation. Given the lengthy transition period and the commitments of FASB and the banking regulators to education and implementation guidance, smaller banks are encouraged to wait before investing in a new financial modeling package.
While many bankers welcome the flexibility to build known expectations into their loss modeling rather than waiting for a loss to be incurred, there was concern about the validity and documentation related to long-range forecasts. Bankers expressed concerns about applying national or global data to their smaller, more diverse lending portfolios. Although FASB made it clear that reversion to historical average was appropriate for periods beyond a bank’s ability to forecast using reasonable cost and effort, banks reiterated the challenging documentation requirements of auditors and regulators to support judgments and estimates.
Collective Versus Individual Analysis of Loans
Several banks highlighted the unique characteristics of many of their loan portfolios and were concerned about being forced to analyze loans on a collective basis. FASB noted the final standard would be clear in stating unique loans that are not part of a homogenous pool could continue to be evaluated on an individual basis.
Change to Loss Provisions
In 2011, the OCC and Fed estimated loan loss reserves could increase by 30 percent to 50 percent, based on conventional expectations and 2010 data. OCC’s representative clarified it doesn’t intend to set benchmarks or expectations for changes in loss reserves for banks it examines based on this study. Both the OCC and ABA agree that economic conditions, loss reserves and underwriting standards have markedly improved. The ABA now points to a survey prepared by KBW that predicts a median increase of 3 percent for small and midsize banks. The OCC notes all banks are different; some could see increases above this level while others could see smaller increases.
BKD will continue to monitor this project.