In the book "The Big Short" — an account of the 2008 financial crisis that is now a major film — a pioneer of subprime mortgage securities describes the business as one "where you can sell a product and make money without having to worry how the product performs." This root cause of the worst economic collapse since the Great Depression is in direct contrast with community banking, in which local bankers are held personally accountable to the customers with whom they live, work and worship.
So community bankers were justifiably troubled to hear that Financial Accounting Standards Board Chairman Russell Golden recently called community banks "a major part of the problem" during the crisis. He made the comment to justify FASB's proposed accounting standards update, which would force all banks to invest in expensive credit modeling systems and to record a provision for credit losses the moment they make a loan. What was his evidence? There were 168 bank failures from 2007 through 2009.
There are many flaws with this argument. The financial crisis indeed took a toll on many community banks and other small businesses, but the crisis was largely caused by the risky practices of unregulated mortgage lenders and the packaging of bad loans by Wall Street firms. In fact, most community banks fared well, by comparison, during the crisis because of their personalized, relationship-based business model. While the too-big-to-fail megabanks pulled back their lending in many parts of the country, the too-small-to-save community banks continued providing much-needed credit to keep their local economies afloat.
Golden's inaccurate comments raise questions about FASB's ability to set independently financial accounting standards. Blaming community banks for the crisis is like blaming Poland for World War II. It shows either a misunderstanding of our financial system or a disdain for local financial institutions, either of which would be damning to FASB's credibility.
His remarks also revealed a major disconnect between his organization and the federal banking regulators that will ultimately implement FASB's standards. Despite Golden's claims that the update will not require complex modeling software and strict regulatory oversight — changes that would remove community banker discretion in making localized financial decisions — regulators have already hosted webinars on how banks should prepare for the regulations. Meanwhile, the Office of the Comptroller of the Currency predicts the standards will result in a 30 to 50% hike in loan-loss reserves — funds that would otherwise be used for local lending and economic development.
As the Independent Community Bankers of America outlined in a recent letter to FASB, the clear divide between FASB and the bank regulators needs to be addressed before these proposed standards are finalized. In the meantime, we continue to advocate for our alternative loss reserve plan for institutions with less than $10 billion in assets. This plan bases loan-loss provisions on historical losses for similar assets, which would build necessary allowances for potential losses and recognize reserves sooner in the credit cycle without bludgeoning community bank lending and local economies.
FASB is already familiar with our proposal; we've been pitching it for years. But if Golden and the rest of the standards-setters need more background, they should visit their nearest cinema to brush up on what really happened in 2008. I hear "The Big Short" is getting good reviews.
Camden R. Fine is president and CEO of the Independent Community Bankers of America.