Community bankers are leveling what looks to be a final burst of criticism at a proposal that would make sweeping changes to the methodology used to calculate loan-loss reserves.

The proposed Current Expected Credit Loss, or CECL, standard would require banks to make a provision for projected credit losses when they book a loan. A final vote by the Financial Accounting Standards Board could come as early as next month. Once approved, the change would take effect in 2019.

Numerous banking experts view CECL as the most important issue to affect the banking industry since the Dodd-Frank Act was enacted in 2010. As a result, lenders and their allies in the accounting community have been unsparing in their opposition to the plan.

The latest salvo comes from the Independent Community Bankers of America, which is attacking FASB Chairman Russell Golden for recent remarks that implied that smaller institutions played a big role in the financial crisis.

Golden told a gathering of certified public accountants in Washington earlier this month that community banks "have been a major part of the problem," noting that those institutions made up the lion's share of the 168 banks that failed from 2007 to 2009.

ICBA officials have seized on the comments, claiming they illustrate a fundamental lack of understanding on the part of FASB of how small-town bankers underwrite loans.

Jack Hartings, the group's chairman, said in an interview that he was "upset and disappointed" by the comments. "I think it shows disconnect between FASB and understanding community bankers and how we lend," said Hartings, who is also president and chief executive of the $500 million-asset Peoples Bank in Coldwater, Ohio.

Hartings was more pointed in a letter he dispatched to Golden shortly after the speech. "To say that community banks were a 'major part of the problem' is a direct slander on hardworking Americans who devote their professional and, in many cases, personal energies to providing for their communities in both good times and bad," Hartings wrote.

The ICBA is concerned that, in order to arrive at the early stage loan-loss projections required under CECL, community banks would be forced to employ complex modeling, even though FASB officials insist otherwise.

"We intentionally made sure [the rule] doesn't require complex modeling," Harold Schroeder, a FASB board member, said in an interview. "We were careful not to require any specific approach to estimating loan-loss reserves."

Most banks have a majority of the information they might need to calculate current expected credit losses, Schroeder said. "Experienced bankers can run down a list of their loans and tell you where the problems are," he said. "If that's the case, they should have no problem estimating losses."

The current standard for calculating loan losses requires banks to add to reserves only after losses are probable. In the aftermath of the financial crisis, the FASB concluded such an approach was hopelessly reactive — "too rearview mirror," as Schroeder put it.

"The problem is it's too little too late," Schroeder said. "It waits until loan losses are obvious."

In an article he wrote earlier this year, Schroeder noted that banks actually scaled back the industrywide ratio of loan-loss reserves to gross loans to 1.15% in 2006, a year before the housing bubble burst and the Great Recession began.

Indeed, that was the issue Golden aimed to address in his Washington speech, FASB spokeswoman Christine Klimek said, adding in a statement that the ICBA had taken his words out of context. "The problem that … Golden was highlighting is the limitation of the current accounting standard," she said.

The remarks "were intended to demonstrate the limitations of the existing incurred credit loss model, and how it prevented more timely recognition of loan losses in lending institutions of all sizes — not just large banks," Klimek added. Golden's "discussion of loan impairment was not intended to suggest in any way that community banks were the cause of the financial crisis."

The ICBA does not oppose the principle of provisioning prior to an adverse incident, such as a missed payment, but the association believes that estimating losses on day one of a loan's life span is too speculative.

"As things stand now, they don't want you to book a provision until there is evidence of a default," James Kendrick, the ICBA's vice president for accounting and capital policy, said in an interview. "Now, they're flipping the whole setup."

And while FASB officials might be sincere in their intent to avoid complex modeling and the expense it entails, they do not speak for banking regulators and auditors who will also play a major role in the new standard's introduction. "It's very clear they are going to want complex modeling," Kendrick said.

Large banks, moreover, would almost certainly use modeling to comply with the standard. Doing so would establish a precedent that smaller banks would be required to observe, Kendrick argued. 

"The regulators are going to get very comfortable with complex models," Kendrick said. "They'll push them on everyone," Kendrick said.

"No one wants to run the risk of not being the most conservative," Hartings said.

The American Bankers Association has reached a similar conclusion.

"On paper, complex modeling is not required under CECL nor will it be required by the regulators.  For practical purposes, however, modeling that is a lot more complex than what is performed now by many community banks will be required, mainly because of auditing requirements," Michael Gullette, the ABA's vice president for accounting and financial management policy, said Tuesday in an email to American Banker.

"If this were 1996, CECL wouldn’t be a real big deal. But with Sarbanes-Oxley, earnings management, and the financial crisis affecting what supporting documentation auditors require, CECL puts the forecasting challenge on steroids," Gullette added.

The Federal Reserve Bank of Richmond advised banks last month to start drafting an initial, high-level plan for CECL implementation that would include an evaluation of capital levels to make sure they will be "sufficient to support implementation on day one."

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