Last week’s comments by the Financial Accounting Standards Board (FASB) about how they will allow the different levels of complexity in credit loss calculations for lenders of different sizes would seem to be a victory for smaller credit unions and community banks.
Beware the unintended consequences.
Experience from the evolution of the CCAR (Comprehensive Capital Analysis and Review) & DFAST (Dodd-Frank Act Stress Tests) regulations suggest that this may produce a worst-of-all-worlds approach.
FASB is making final edits to the Current Expected Credit Loss (CECL) guidelines. They have promised to release them in June 2016.
The first version of the guidelines rightly recognized that a level of loss can be anticipated from the moment the loan is booked. Knowledge of the loss timing for loans can allow an institution to estimate future losses one or several years into the future. A simple loss model of volume booked times the loss timing function would have produced a forecast accurate enough to sound alarms in 2006 about problems in the mortgage market.continue reading »