The unlimited power of FASB
The Financial Accounting Standards Board, or FASB, is an obscure, low-profile organization without congressional oversight that has become a very real threat to the banking industry to include community banks by systematically pushing down new accounting rules on the banking industry that have not been adequately analyzed for their potential risk to the industry in all economic cycles versus any potential reward.
The most recent examples of what I’m referring to are the Current Expected Credit Loss (CECL) accounting standard, which was developed without regard as to its impact on banks of differing sizes and complexity nor the counter-cyclical nature of the rule. CECL now appears to be nothing more than a veiled way to force banks to carry additional capital.
Additionally, the Accounting Standards Update (ASU 2016-02 Topic 842) dramatically changes the accounting for lease transactions by requiring companies to record all operating leases as both liabilities and assets on their balance sheets, thus increasing the capital that banks will be required to carry for these right-to-use non-earning assets that have always previously been a footnote in financial statements.
In July, FASB voted to propose a deferral of the effective dates for several of its recent standards, including CECL and ASU 2016-02, Leases (Topic 842). While that was welcome news for most of us, the fact is the delay is only a temporary solution and we will still, in the future, all be forced to implement the standards.
CECL, the most widely known of the new accounting rules, requires forecasting all future losses at time of loan origination. The interest income, however, cannot be earned on the same asset until much later.
According to the American Bankers Association, the process “increases the complexity of this highly judgmental area of accounting, adds to the volatility of regulatory capital and may also add to the procyclicality of the banking industry.” Needless to say, the process and methodology are very complicated.
The hardest hit victims will be community banks that play a critical role in lending to small businesses in the community as well as customers because of the additional costs related to CECL implementation that will be passed on to them. Small businesses and low-income families will be particularly hit hard due to the elimination of some lending services and restricted access to credit.
The new lease accounting standard requires lessees to record a right-of-use asset and a lease liability on the balance sheet for virtually all leases – potentially causing billions of dollars of operating leases to appear on balance sheets. The new standard will require new procedures, monitoring controls and reporting requirements as well as additional leverage capital to support the additional assets without any offsetting incremental earnings capacity.
This new lease accounting method will also potentially have a negative effect on the businesses that community banks support, impacting a business’s ability to obtain a loan and/or cause a violation of debt covenants. Banks may have to increase loan-loss reserves or possibly raise loan rates in cases where clients have elevated liabilities.
It’s troubling to me that FASB would have so much power to negatively impact the banking community, its customers, small businesses and our economy – and to what end? What is the benefit? Do we really think it will make the calculation of reserves more accurate? How does it improve the safety and soundness of our institutions? While TBA continues to work on both the legislative and regulatory fronts to counter the impact of FASB’s new rules, the bottom line is that FASB should not have so much power to affect our banks, communities and our customers without undertaking a quantitative impact study.
BB&T Corp. Chairman and CEO Kelly King recently summarized the problem very succinctly: “I mean, the banks will be able to survive it (CECL) but the problem is, if it goes into effect as now projected, it’s really bad for the economy. It’s really bad for consumers. It’s really bad for business. It is not the right thing to do, and so we are asking FASB to slow down, take a breath. Let’s study this carefully and let’s see what the real impacts likely are. Let’s make some adjustments.”