Invictus Bank Insights – April 2018

CECL TRENDS The Biggest CECL Mistake Most Banks will Make — and How to Avoid It

By Adam Mustafa and Lisa Getter, Invictus Group

Five years from now, every bank will have undergone at least one full year under the current expected credit loss (CECL) standard, and most public banks will have three years under their belts. Best practices will begin to emerge, and so will the biggest blunders.

Mistakes will be very expensive; the price to pay will include wasted shareholder value from grossly excessive loan loss reserves, unnecessary expenditures and needless time on implementing the wrong system, and ultimately, the need to start over to get it right. For community banks, these CECL mistakes will cost many millions of dollars, with multiples even higher for larger banks.


REGULATIONS Disruptive Thinking: Is the Community Bank Leverage Ratio Fool’s Gold?

By Adam Mustafa, Invictus Group President and CEO

The financial regulatory reform bill that recently passed in the Senate contains a number of so-called goodies for community banks. But one of those provisions is actually fool’s gold: the “capital simplification” that calls for a new community bank leverage ratio.

Senate bill 2155, known as the Economic Growth, Regulatory Relief, and Consumer Protection Act, calls for bank regulators to develop a community bank ratio, based on tangible equity capital, “of not less than 8 percent and not more than 10 percent.”


Exclusive Study: Banks Don’t Need More Than 8 Percent Capital Leverage Ratios An Example of Why Data Matters In CECL

Example: A bank has a significant concentration of its commercial real estate loans risk rated a 4. Those loans will have a range of debt service coverage ratios (DSCRs). Some will have DSCRs greater than 2


10 Percent Capital Should Be the Norm: Hoenig

Rolling back post-crisis capital standards on the largest banks is a big mistake that will “undermine the long-term resilience of not only the banking system, but the broader economy as well,” outgoing FDIC Vice Chairman Thomas M. Hoenig warned in a speech at the Peterson Institute for International Economics in Washington, DC. Hoenig repeated his call for a capital ratio of 10 percent equity to total assets as “the minimum standard for every bank wishing to operate in the United States.” He said studies show stronger bank capital contributes to a more sustainable economic growth, despite widespread views to the contrary. “The failure to better understand the nature and disparate effect of regulations on the industry will be to increase the costs of banking and encourage ever-greater consolidation of the industry,” he said.


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