Wednesday, July 29, 2015

You’ve heard the old line that an elephant is a mouse built to government specifications?

We’re all familiar with how government spending tends to grow rather than shrink. An equally troubling tendency perhaps even more familiar to community banks is the way governments often apply a cookie-cutter approach to their policies.

Regulations are inherently rigid and often fail to account for the unique circumstances of individuals and businesses. That often means a one-size-fits-all approach to a community banking model based on individual relationships and one-on-one service. Think Basel III—a capital framework designed for global financial institutions that nevertheless applies uniform standards on Main Street community banks.

While ICBA and community bankers have given everything they’ve got on Capitol Hill and at the regulatory agencies to institute a system of tiered regulation based on size and risk, a radical change to financial accounting due out as soon as this year threatens to deal yet another blow to locally based banking.

The Financial Accounting Standards Board is expected to release its updated accounting standards on credit losses in the fourth quarter. These new standards would require complex modeling and compel banks to recognize losses much earlier than necessary in the credit-loss cycle, penalizing community banks for investing in loans and securities.

What does this mean for community banks and their customers? For one, it will mean fewer loans. Currently, community banks don’t make an allowance for loan losses unless they have evidence that they’ll incur a default. Under the FASB’s “expected loss” model, banks would instead take a hit the moment they make a loan. Not only would banks have to recognize a loss on day one, but the proposal requires complex and expensive modeling tools that will inhibit the ability of local banks to make localized financial decisions. The Office of the Comptroller of the Currency estimates that the proposal will increase loan-loss reserves by an average of 30 to 50 percent.

Further, this plan will only add to the regulatory burdens overwhelming the community banking industry. Forecasting inputs used to predict potential loan losses will never be strong enough to satisfy the scrutiny of bank examiners. There will always be another rock to look under as examiners try to ensure a more precise model. So what we have is an approach to loan losses that is at once expensive, burdensome, time consuming—and yet never enough to satisfy examiners. Bottom line, this proposal is a double whammy of decreased lending and increased regulatory scrutiny for community banks and the customers they serve.

But there is one other saying that this whole deal brings to mind, which is that you should never try to out-stubborn a cat.

Community bankers are a stubborn lot and aren’t about to back down from this radical policy change. It’s why we’ve come up with an alternative proposal for institutions with less than $10 billion in assets that bases loan-loss provisions on historical losses for similar assets. It’s why we’ve met repeatedly with the FASB, including several times at the board’s headquarters in Norwalk, Conn. And it’s why nearly 5,000 community bankers signed a petition advocating ICBA’s simpler approach.

Our nation’s hometown banks have fought and clawed so they can continue serving their communities amid a raft of new regulatory burdens. We’re not about to let yet another cookie-cutter government regulation take hold without a fight.

Camden R. Fine is the President and CEO of the Independent Community Bankers of America.

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