Magazine article American Banker

FASB Chief Is Dead Wrong on Small Banks' Role in Crisis

Magazine article American Banker

FASB Chief Is Dead Wrong on Small Banks' Role in Crisis

Article excerpt

Byline: Camden R. Fine

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. …

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