Pub. 8 2019 Issue 4

The CommunityBanker 6 Chairman’s Message M E S S A G E By Lloyd Harrison VACB Chairman Virginia Partners Bank Reading The Future By Cecil O nce, long ago, I was accused of not communicating clearly. I vowed never to make that mistake again. In that spirit, let’s talk about the Financial Accounting Standards Board’s (FASB) Current Expect Credit Loss framework, more commonly knowns as CECL. CECL is nothing more than the quest for theoretical purity at the expense of common sense and experience. The heart of the matter is the requirement to account for the expected lifetime losses of a loan at the time of origination. How do you do that? Simple. FASB says to use forward-looking information, including “reasonable and supportable forecasts.” In other words, predict the future and mathematically quantify what the future will bring to the collectability of each and every loan for the life of the loan. Funny thing about the future, it often unfolds in very many unexpected ways. You don’t have to look too far back in history to find examples of policy decisions, election results, or technological disruption that significantly changed the trajectory of economies or sectors thereof. For example: • The Amazon effect on retail. • In 2008, the Great Recession begins. • Uber starts in March 2009. Think taxi medallion loans. • The Affordable Care Act is signed into law in 2010. • Brexit, June 2016. • Donald Trump wins the election November 8, 2016. So the foundation of CECL is built upon some sort of Carnac-like prediction of the future, unless, of course, you can’t. Then you look to historical data, such as loss rates, vintage analysis, probability of default and loss given default, all of which must be well supported…which you then adjust based upon your reasonable and supportable forecast. (This is my summary of the 43-page SR 19-8 FAQ on CECL.) All of this conflates complexity with accuracy. Within the banking industry, there is significant concern that CECL will be procyclical. Community banks could be out of the business of lending when the next crisis hits. There is also considerable skepticism about CECL in the investor community. A survey by FIG Partners earlier this year reported that 80% or more of survey respondents saw no need to change current rules and felt that the new rules would be procyclical. In the face of substantial opposition, based upon well-founded concerns, for FASB to continue with CECL is simply intellectual hubris. In fact, I could make the argument that given this well- documented opposition, I have a reasonable and well-sup- ported basis to believe that implementing CECL will cause material harm to my bank. Therefore, my implementation of CECL should be to avoid it altogether. Finally, complexity drives costs. Especially for community banks, the time and cost to develop, analyze, and report under the CECL regime is burdensome and ongoing. My bank began the transition expecting to be able to handle this internally. As we got further into it, we changed our minds. We hired a vendor and still face considerable consumption of internal re- sources to adopt CECL. What worries me is that this is part of a broader pattern. The costs of increasingly complex rules and regulations are more easily absorbed by larger companies. Not so with community banks. We owe it to our customers and our employees to docu- ment every minute and every dollar that we spend on this folly, and to make sure that every regulator, policymaker, and ally knows the full story. Is it too much to hope that CECL could simply expire someday, collapsing of its own weight, and the knowledge that it would never accomplish its intended purpose? The author and members of his management team conducting fieldwork in search of reasonable and supportable forecasts.