Magazine article Independent Banker

Misguided Guidance

Magazine article Independent Banker

Misguided Guidance

Article excerpt

Yea or nay, either support or oppose. Sometimes advocating in Washington seems to involve a roll call of those binary choices. But often effective advocacy involves a third option that provides constructive alternatives to poor proposals, particularly those trying to address commonly recognized concerns.

For more than three years ICBA and community bankers have been heavily involved in the third advocacy approach to repair the Financial Accounting Standards Board's proposed guidance to impose a new expected-loss credit impairment accounting model. The final FASB Accounting Standards Update, which would broadly apply the new impairment model to all community banks under GAAP principles, is expected to be released by year's end. Unfortunately, if FASB adopts the proposed standard without the critical changes ICBA and community bankers have advocated, the guidance will impose terribly costly and unwieldy accounting burdens that will unnecessarily harm community banks and, by direct extension, local economies.

Developed in response to claims that loan-loss reserves at the largest Wall Street institutions proved inadequate during the last financial crisis, the FASB guidance would force every community bank to adopt a single megabank approach for recognizing credit losses sooner in the credit cycle. While most community banks agree with FASB that recognizing credit losses sooner will help cushion against economic downturns, the current guidance FASB has proposed is highly impractical for community banks.

Unless FASB changes course, community banks will be required to estimate credit losses for every loan and recognize the net present value of those estimated losses at origination. As a result, the guidance would immediately impose financial statement losses when loans are first originated or acquired-theoretical losses that most likely would never materialize. …

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