I’ve written several articles about the future of banking, but it appears the Financial Accounting Standards Board could be putting nails in a few coffins. FASB’s complex proposal (Current Expected Credit Loss, or CECL) would force community banks to record a provision for credit losses the moment they make a loan.
Let’s look back a few years at around 2007 and 2008, around the time of the Great Recession. Regulators, many who had never owned a piece of property themselves, walked into community banks and forced those institutions to write down their real estate loans, simply because it was real estate.
Even though many of the borrowers had high net worth, great credit and flawless payment histories, the banks were forced to write down those loans.
Then the bank directors were told to raise their capital or be forced to shut down. Many banks who were able to raise capital were immediately forced by the regulators to write down even more real estate loans.
A personal aside: During that period, I received a phone call from a bank in Alabama saying the regulators were forcing them to short sell real estate they had loans on. One of those was a piece of property I had a note on. Keep in mind, I had never missed a payment. Regulators forced my lender to short sell the properties simply because the directors had raised an additional $50 million in capital. The bank allowed me to sell the property with a $200,000 haircut, with no penalty. They even paid the sales commissions and closing costs. Many developers I know were smart enough to then buy their real estate back for 10 cents on the dollar.
Examples like mine happened across the country, with devastating impact on the real estate and mortgage market. In order to conserve capital, many bankers stopped making real estate loans and started cancelling borrower’s lines of credit, forcing borrowers to go under, pushing real estate values even lower.
Soon after capital dried up and banks were being shut down, the FDIC decided to target bank board members, socking them with multi-million dollar lawsuits. Mega-successful business people who had poured much of their life savings into their community banks, were now being sued personally by the FDIC for negligence, only a few months after getting CAMELS ratings of ones and twos.
As we all know, you can’t start or operate a bank without board members. How many successful business owners would want to join a bank board after watching the way the FDIC treated previous bank board members. Fast forward to 2016. Present-day bank board members all over the country are thinking long and hard about every loan they make, a reality that might well explain a still-struggling economy. With all the additional regulation costs and a major increase in Directors and Officers Insurance, as a result of all the FDIC lawsuits, the margins are still slim for most community banks.
And now, the FASB wants banks to start writing off loans before the ink has even dried. FASB chairman Charles Golden called community banks “a major part of the problem,” in the financial crisis, his inaccurate justification for FASB’s proposed accounting standards update, which would force all banks to invest in expensive credit modeling systems and to record a provision for credit losses the moment they make a loan.
The Office of the Comptroller of the Currency is already predicting these new rules will result in a 30 to 50 percent hike in loan-loss reserves, further slowing down lending and economic development.
The mystery in all of this is why community banks are in the crosshairs of the FASB.
While the FASB tries to lay the blame for the financial crisis at the doorstep of community banks, community bankers –those of the “too-small-to-save” institutions –were extending loans to keep local economies afloat.
Let’s hope that in the wake of this latest decision, FASB comes to its senses before the FDIC has to start cleaning up more bank failures. Unless it does, the economy may never fully recover and our nation will not meet its vast economic potential.