Read Between the Lines September 2019

Keeping up with CECL, Despite Delay

Although the Financial Accounting Standards Board is giving small banks more time to comply with CECL, there may be advantages to implementing the standard sooner. Adopting early may help banks support their loan loss reserves without seeing a material increase by using more data and analytics instead of overly relying on qualitative factors. The board voted to delay CECL implementation for most community banks (private companies and small public business entities) until 2023. All other SEC filers remain on schedule, with implementation expected by January 1, 2020. All banks would be wise to keep abreast of FASB’s efforts to clarify Frequently Asked Questions, which it recently updated. The answers include guidance on topics such as do banks need to reevaluate their reasonable and supportable forecast period each time they report (yes); whether a forecast requires a computer-based model (no, Q-factors are allowed); if banks can determine expected credit losses using only historical information (no).

Fed Enhances Exams with Risk-Assessment Data

The Federal Reserve is using “a suite of data-driven, forward-looking surveillance metrics” to classify bank risk. It then assesses whether management can properly manage and monitor those risks as part of safety and soundness exams. The new process is called Bank Exams Tailored to Risk. It “combines surveillance metrics with examiner judgment,” with the goal of reducing supervisory resources and minimizing regulatory burden. High-risk activities will be targeted for increased exam attention, while low-risk activities will be streamlined. The metrics cover credit, capital, earnings, liquidity, market and securities risk, and the Fed said it is working on developing more analytics for other risks, including operational. “Banks should not bring a knife to a gun fight,” advises Invictus CEO Adam Mustafa. “The tools that banks use to manage risk, build their capital plan, and develop their strategic plan must also use analytics that follow the same principles – forward-looking and pre-emptive!”

Stress Testing Lessons: They’re Here to Stay

Although Congress eliminated stress testing for banks below $100 billion in assets, don’t expect the tests to disappear for the largest banks. “We’re still going to have them,” Fed Vice Chairman for Supervision Randal K. Quarles told a Boston Fed Research conference in July. “Over the course of the last 18 months, I have heard overwhelmingly—from academics, from think tanks of every stripe, from banks of every size, from regulatory colleagues both domestic and foreign—that stress tests should continue to be a key element of the Federal Reserve’s supervision of systemically important banks and a key aspect of the Fed’s efforts to promote financial stability,” Quarles said, noting that the tests are “the most risk sensitive and consequential assessment” of bank capital requirements. He said the Fed is considering options to provide additional transparency regarding models, scenarios and scenario design in the future. It is also considering integrating stress testing with traditional regulatory capital rules, holding the largest banks to a “single, integrated capital regime.”

Bank Risks: Deposits, Interest Rates, Concentrations

The OCC’s Spring 2019 Semi-Annual Risk Perspective notes that banks are facing challenges from uncertainly over interest rates, increased competitions for deposits, new technologies and changing customer expectations. The three top risks that led to Matters Requiring Attention for mid-size and community banks as of March were operational (36 percent), credit (27 percent), and compliance (23 percent). The report noted that community banks in the central, western and southern areas of the U.S. face heightened credit risk because of agricultural exposures, and CRE concentrations remain “highly concentrated” in some banks. “Approximately 6.8 percent of OCC-supervised banks report total CRE exposure greater than 300 percent of capital, or construction and development loans greater than 100 percent of capital, or both,” the report notes, adding that the level is down from previous years.

Community Bank Regulatory Burdens Easing

It’s official: The Volcker Rule does not apply to community banks.

Regulators also finalized the rule that streamlines Call Reports for most banks with total assets of less than $5 billion. The new rule reduces by about one-third the number of data points banks need to report for the first and third quarters.

The FDIC also approved the final community bank leverage ratio. Invictus recommends that most banks conduct stress tests to quantify their own requirements before opting into the new standard.

FDIC Chair Jelena McWilliams said in a June speech that the FDIC last year rescinded nearly 60 percent of its supervisory Financial Institution Letters after determining they were outdated or redundant.