Community Bankers of Iowa Monthly Banker Update April 2014 | Page 6

Fine Points
Written By: Camden Fine, President and CEO of ICBA

FASB Gone Awry
For once, it’s not regulators or lawmakers
pushing a policy proposal that would impose
financial chaos on community banks and Main
Street. This time, it’s accountants.
Every community banker should be aware of
and very concerned about a new accounting
proposal from the Financial Accounting
Standards Board. The new FASB proposal
would impose a radically different “expected
loss” impairment model on banks calculating
losses from loans and investment securities
for their financial statements. Similar to last
year’s Basel III and Volcker Rule proposals,
FASB’s proposal presents a clear and present
danger to community banks. The proposal is in
response to claims that loan-loss reserves at
the largest financial firms proved inadequate
during the last credit crisis. However, this
theoretical new accounting method would
simply be incompatible with the realities
of community bank lending and portfolio
management.
By heavily front-loading anticipated losses,
without considering the true evolution of
losses realized throughout the credit cycle,
the practical effect of FASB’s proposal would
be to depress earnings and valuations
severely, without regard to the actual credit
quality of community bank portfolios. It
would unnecessarily impose immediate
balance sheet losses that would not actually
materialize for years, if ever. Just as
damaging, it would also penalize community
banks for achieving strong loan growth, the
very activity our nation needs to encourage.
Additionally, the complex modeling techniques
that FASB’s new approach would require will
generate further onerous costs and burdens.
All in all, FASB’s proposal would bring financial
mayhem to community banks and Main Street.
However, all is far from lost. While formally
asking FASB to exempt financial institutions
with consolidated assets of $10 billion or less
from its proposal, ICBA has also offered a
more workable alternative. To achieve FASB’s

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CBI BANKER UPDATE | APRIL 2014

accounting objectives, ICBA’s proposal would
allow community banks to rely on historical
losses to build their loan-loss reserves. Our
proposal would base loan-loss calculations
on a specific measurement of impairment that
coincides with the credit risks inherent to the
nonperforming financial instrument. Under this
calculation, community banks could also easily
manage—and investors could more easily
apprehend—their loan-loss reserves without
relying on overly complex software modeling.
Fortunately, FASB is listening. ICBA has been
working with the board for more than a year
on this issue, and the board is conscientiously
considering our alternative proposal, which is
supported by 41 state banking associations.
So our alternative, like other successes
community banks have had with influencing
FASB proposals, has a strong chance of
prevailing.
But, as you can anticipate from me by now,
convincing FASB to adopt our industry’s
alternative proposal, no matter how sensible
and constructive it might be, likely won’t
happen without the help of community bankers
throughout the country. You and your board of
directors must speak out. Check out ICBA’s
advocacy Web page at www.icba.org/beheard
for more details, and then write FASB as soon
as possible, explaining how our industry’s
alternative is much better for your community
bank. Then carefully follow the issue for new
developments and alerts.
Yes, fixing FASB’s flawed accounting proposal
is yet another critical advocacy issue our
industry must confront. But we’ve proven time
and again that we can handle almost any
challenge when we stand together. We’ve
been at the table. Let’s follow through and
ensure common sense wins out again.

Following Mr. Fine

More than 1,000 people are following
Camden Fine’s tweets @Cam_Fine—are
you? Visit www.twitter.com/cam_fine.