2019 Journal of Community Bank Case Studies

2019 COMMUNITY BANK CASE STUDY COMPETITION

Deloitte cautions that CECL is likely to be one of the most significant accounting projects of the next five years and that banks must think strategically about CECL’s far-reaching implications. Essentially, the standard creates a new model for determining the allowance for credit losses (Lundberg and Miller). Current US GAAP stipulates that only those losses that have been incurred to date need to be reflected in the financial statements. In contrast, the new requirements call for an estimate of expected losses over the life of the asset to be included instead. The underlying premise of CECL is that the allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset (Lundberg and Miller). Short Form Report While the ‘jury is still out’ on any potential positive impacts stemming from the Simplified Capital Rules, Kish is optimistic that benefits will ensue from the regulation that focuses on call reports in EGRRCPA. Indeed, of all the provisions, this had been identified as the one that helps Kish out the most financially. Formerly, all banks were required to submit a detailed report at the end of every financial quarter. The forms or “schedules” of the report include information on the bank’s income, expenses, and balance sheet which had to be entered manually by Kish personnel. The reports were then used by agencies to monitor the safety and soundness of financial institutions (FDIC). EGRRCPA now directs regulators to shorten and simplify the reports required by Kish

Kish is optimistic that benefits will ensue from the regulation that focuses on call reports in EGRRCPA

it may necessitate holding additional capital and not having the ability to leverage that capital would impact on lending and slow shareholder return, which is the antithesis of what the legislation is seeking to achieve. Furthermore, Mr. Baxter noted that falling under the level set by the regulator could cause “increased regulatory scrutiny, additional expense, and restrictions on the bank” putting Kish at a disadvantage vis-a-vis its peers, which the bank is keen to avoid. Using the traditional calculations “allows for lower levels of risk- based capital” and the ability to remain “well capitalized”. Additionally, while the legislation provides for opting into the new CBLR, it is unclear if it would be possible to opt out at a later stage and then opt in again or if opting in obliges the bank to continue to use the CBLR for all periods going forward. Another complication identified by Mr. Greg Hayes, which could dovetail with the CBLR, is a change to US GAAP concerning losses, known as Current Expected Credit Losses (CECL).

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