Banks—especially small banks—have traditionally made money by accepting deposits from local customers and then lending the money at a higher rate. The difference—called the net interest margin—was and is used to:
Cover overhead, other expenses and provisions for loan losses
Reward investors with dividends
That model worked pretty well for decades. However, growing competitive and technological changes are altering the banking landscape. And the changing behavior of “core” depositors is affecting small-bank balance sheets.
Funding and cybersecurity top the concerns for community banks, according to the latest annual community bank survey conducted by the Conference of State Bank Supervisors (CSBS). It is a marked shift from previous years, when regulatory compliance costs were found to be the chief issue for community banks. The survey was released in the conference volume of the seventh annual Community Banking in the 21st Century research and policy conference. The conference, which is sponsored by the Federal Reserve System, CSBS and the Federal Deposit Insurance Corp., is hosted each fall at the Federal Reserve Bank of St. Louis.
CECL is designed to improve the quality of financial information, especially approaching and during times of economic stress.
The new accounting standard is being phased in, beginning in 2020 with the nation’s largest publicly traded banks. A recent proposal by rulemakers will defer transition for most other institutions—such as community banks and credit unions—until January 2023.1
Information provided by community banks about CECL preparation indicate that most have started the implementation process by gathering and analyzing data. Some have gone further by selecting a methodology and testing it.
Despite the progress, many bankers continue to express concerns about the transition. These concerns typically center on the time required to prepare, vendor fees, the time and effort needed to obtain and organize data, and even the uncertainty of knowing if they have “gotten it right.”
We are more than a decade removed from the financial crisis—a time when many factors converged to threaten the viability of our financial system. Since then, numerous reforms have been implemented. Today, our banking system is substantially stronger and more resilient.1
Financial regulators have introduced many of those reforms. But other groups have acted as well, including the accounting community through the Financial Accounting Standards Board (FASB). The FASB has recognized the need for change in how firms account for losses in assets held at amortized cost on the balance sheet. The result is a new accounting standard: the current expected credit loss (CECL) model.
This blog post is the fifth and final in a series about fintech and how it is affecting the banking industry. Last month, we looked at how digital, or mobile, wallets work. This month, we examine distributed ledger technology.