Community Banks Win Reprieve on New FASB Loan-Loss Reserve Rule

  • Board gives smaller firms more time to comply with standard
  • Rule requires banks to reserve for losses when loans are made

A new U.S. accounting rule on how banks reserve for loan losses won approval yesterday after concessions were made for smaller financial companies.

The Financial Accounting Standards Board voted to proceed with the new rule, which has been under discussion for six years, and plans to publish a final version in June. At its meeting yesterday, the board delayed implementation of the standard for one year, to 2020, and gave companies that don’t have to file reports with the Securities and Exchange Commission, including many community banks, an additional year to comply.

The board also agreed to allow community banks to disclose data about older loans over a three-year period following that date and to use existing models for projecting losses. Community banks had been complaining about the potential cost of complying with the new standard, which requires banks to provision for losses on all loans when they are made based on expectations about future performance.

“Without getting community banks on board, FASB couldn’t move ahead,” said Greg Hertrich, head of strategy for U.S. banking investments at Nomura Securities. “They’ve won many concessions, including the longer time frame for implementation. The small banks were worried they had to buy expensive risk-measurement systems, but now it seems they can use their existing methods to calculate expected losses, and that’s a relief for them.”

Complex Modeling

The new standard came about in response to criticism during the 2008 financial crisis that banks were slow to record losses on souring loans. It aims to speed up that process when economic conditions worsen and keep a certain level of reserves so losses don’t jump in times of stress.

A 2012 draft of the rule called for complex modeling to make calculations about future losses, which would be costly for small banks that don’t already employ them, according to James Kendrick, vice president of accounting and capital policy at the Independent Community Bankers of America, an industry group. In the latest version, he said, the rule allows smaller banks to continue using existing spreadsheets to estimate future losses.

“They’ve made a lot of concessions, and the decisions from the board meeting shows that,” said Kendrick. “All these changes will make the new rule scalable for community banks.”

John Pappas, a spokesman for FASB, said changes were made to reduce costs by giving companies the flexibility to choose the best method for estimating losses and allowing them to make projections based on historical experience.

He said the group appreciates the feedback it has received on the proposal over the years. The new model “is based on valuable feedback from our stakeholders, including community banks and credit unions, who now understand that they will not be required to employ overly complex and expensive models to implement the guidance,” Pappas said.

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