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Action requested! -- FASB exposure draft on impairment

 

FASB exposure draft on impairment

To All Bank Presidents and CEO's:

The Financial Accounting Standards Board (FASB) has proposed a new Accounting Standards Update (ASU) to replace the "incurred loss impairment" model that's been used for a very long time. The proposed rule would be replaced with a model based on expected credit losses (CECL) (and it will fundamentally change the manner in which your bank establishes its loan loss reserve (ALLL).

Under this proposed Accounting Standards Update (ASU) the expected credit losses (CECL) model will require bankers to estimate potential losses over the life of loan (LOL) at the time of origination or purchase.

You can review a summary of the ASU on impairment by clicking here.

Here's the problem all member banks face: Should this rule be finalized as it is currently proposed, the LOL loss concept will present significant problems for bankers:

  • Your bank will have to make wholesale changes to the systems you use now to calculate your bank's loan loss reserve (ALLL) and OTTI status. This means that:

    • Current systems that rely on annualized charge-off rates will not be sufficient to make this calculation.

    • Some current credit metrics, such as whether the loan is delinquent, will not be relevant to the actual ALLL balance.

    • Vintage analysis will likely be required across all of the bank's portfolios in order to support the calculation of potential LOL losses.

  • Losses that are possible several years in the future will be recorded right away, while the interest earned in the meantime is not.

    • Banks offering long-term products will experience a strain in capital.

  • Your bank will be required essentially to predict the future and make future forecasts or guesses about how your loan(s) are going to perform in the future. The longer the time-frame for such a forecast or guess, the more likely it is that the forecast or guess will be less reliable.

    • The problem is that the decrease in reliability will result in a new order of volatility and a new buffer will be needed in managing the bank's capital.

The OBA is preparing a comment letter, but it's more meaningful if FASB hears about your bank's specific concerns. In that regard, we offer the following points for you to consider including in your comment letter.

REMEMBER: this is your bank's letter. Please use your letterhead and note that FASB basically ignores "form" letters. In order to have it considered, please be as specific as possible.

Letter Suggestions:

(Date)

Russell G. Golden
Chairman
Financial Accounting Standards Board
401 Merritt 7
PO Box 5116
Norwalk, CT 06856-5116

Send via email to: director@fasb.org

RE: Exposure Draft 2012-260 - Current Expected Credit Loss (CECL)

Dear Chairman Golden:

Thank you for the opportunity to provide our thoughts about the above-referenced Exposure Draft dealing with the new credit loss estimation model.

(Next paragraph to do the following):

  • Describe your bank, its trade territory and principle lines of business;

  • Total assets, deposits, loan-to-deposit ratios, ROA; past dues to total loans;

  • How many employees you have, as well as the number of branches;

  • Set forth the percentage of your assets in loans and in debt securities;

  • Describe the make-up your loan portfolio:

    1. Percentage of loans for residential mortgage loans

    2. Percentage of loans in the C&I category;

    3. CRE loans;

    4. Agriculture-related loans for various purposes;

    5. Percentage of debt securities portfolio in government agencies and municipals;

  • The hours your bank presently spends in performing its ALLL analysis and estimate.

In addition:

  • Annual loss experience (current and trends since 2008) ("Under this new proposal, our bank will be starting with numbers we know are wrong because they will be based on historical averages, not actual experience.);

  • Loans that are renewable, revolving or otherwise have no need to be analyzed by life of loan generalities and estimates/guesses;

  • 12-month forecasting over the communities we serve is about as far as we can realistically go. Anything beyond that is simply a guess and will create unnecessary volatility. Its reliability is seriously questionable. How will our examiners view these "guesses"?

  • We're concerned about how prudential regulators, in our case the (State Banking Department, OCC, FDIC or Fed) will ultimately review our processes because of the difficulty in back-testing our estimates;

  • Recognizing losses at the outset of the booking of a loan, but not recognizing interest income to offset these losses is unnecessarily punitive, especially for banks your size.

  • More capital will be required, even though our current capital stands at (list the capital strength numbers).

Thanks for the opportunity to provide our bank's views and concerns about this proposal. We encourage that more thought be given to it and that more banker input can be provided.

Please feel free to get in touch with me with any questions or concerns.

Sincerely,

<Bank>
<Contact information>


NOTE: Click here to find the more detailed comment letter that has been prepared by the American Bankers Association. It's really well-done.

Finally, and perhaps most importantly, our deepest appreciation and thanks goes to Donna Fisher and the expertise of her staff at the American Bankers Association for doing most of the research on this very important topic. It's just one more example of how the OBA's alliance with its sister state bankers associations and the ABA can be leveraged for the benefit of every bank in Oklahoma and, indeed, across the nation.

 

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