Will CECL model force additional reserves for acquired loans?

Jul 17, 2015

As financial institutions await final guidance on the Financial Accounting Standards Board’s (FASB) new model for estimating losses in the allowance for loan and lease losses (ALLL) calculation, banks and credit unions across the U.S. are trying to figure out how the new standards will affect them.

American Banker recently highlighted one specific industry concern: that under the final version of the current expected credit loss (CECL) model, banks will have to hold excess reserves on acquired loans.

Critics, including the American Bankers Association, say proposed ASU Subtopic 825-15 “would in effect force banks to account for expected losses in acquired loans twice: once when moving the loan to their balance sheet, and a second time when they reserve against it,” according to the news outlet. The ABA estimates the proposed rule would require buyers to hold excess capital of up to 5 percent, effectively creating a “tax on mergers,” American Banker reported.

Joe Stieven, a member of the FASB Investment Advisory Committee and head of Stieven Capital Advisors in St. Louis, has argued to the FASB that the board should treat impaired and unimpaired purchased loans the same way as it relates to the loss model.

FASB indicated to the news outlet that it expects its final standard, expected at the end of the year, will address the perceived problem. And in April, it tweaked the language describing acquired loans that banks would have to book reserves on in an effort to address the concerns. The tweak, American Banker says, would exempt slightly more loans from the alleged double counting.

But as Sageworks Senior Risk Management Consultant Tim McPeak told the news outlet, this is just one of several major issues that have kept banks in limbo amid the protracted deliberations on the new credit loss model, which is three years in the works. The transition from an incurred loss model to an expected credit loss model is a major one with far-reaching implications for institutions’ risk management processes.

“We’re all on the edge of our seat waiting to see what they’re going to tell us,” McPeak told American Banker.
In the meantime, the best banks can do to prepare for the new model is to make sure they will have the right information, he told the news outlet.

“The common question banks ask is, ‘What can we do today?'” he said. “You should just try to capture as much data about your loan portfolio as you can and try to store it as well as possible.”

To see the original article featuring information from Sageworks, visit American Banker: An M&A Tax? Accounting Body Split on Controversial Bank Rule.