It’s a new reality for banks in 2020

With the start of a new year—a new decade—it’s the perfect time to take a look at some of the sweeping changes that are going to transform our industry. And while some of those changes—like advances in digital banking and enhanced payment systems—will have a direct impact on improving the customer experience, other changes behind the scenes that aren’t so obvious will have a big effect on banks in 2020 and beyond. 

One of these proposed changes deals with a new accounting standard for how banks reserve for potential losses on loans. This is called Current Expected Credit Losses, better known by the acronym CECL. And this new accounting standard will have a significant impact on banks, consumers and local communities alike.

What will the impact of CECL be to banks?

Under CECL, banks will have to reserve funds for expected loan losses over the lifetime of a loan. This is different than before, where we kept reserve funds for anticipated losses over 12 months. That’s a big change for banks and could lead to our reserve funds increasing as much as 30% or more.

Those in favor of the CECL standard like to point to the idea that it will increase transparency of financial institutions. It’s a powerful argument when we look at what happened with subprime mortgages. But that transparency claim isn’t as clear as you may think. The changes required by CECL will involve a deeper level of modeling, analysis and reporting than banks have ever done before. This means more complex reporting for analysts and everyday consumers and investors to break down.

What does this mean for the consumer?

One of the biggest impacts of CECL will be a consumer’s ability to get access to credit and capital. Communities that rely on community banks could be hit hard, as community banks may have to eliminate some lending services, increase loan pricing, and make qualifying for credit more difficult.

This new standard could hinder business growth, make it more difficult for people to get access to credit, and severely stunt a community’s economy. Most importantly, next time there is a recession, CECL will reduce the amount of capital or credit available when it’s needed most—and community banks could be the most impacted. This could drive up the number of community banks merging with larger ones. So, if CECL is aimed at preventing another financial crisis, where the phrase “too big to fail” first became part of our lexicon, it actually might have the opposite effect.

How’s Valley reacting to CECL?

At Valley, we’ve been prepared for implementing CECL, but that doesn’t mean we’re okay with the effects CECL will have on our communities. External variables that consumers may not be aware of can still have significant impacts on people’s lives. Our role as a financial institution is to help people and businesses succeed, so that, in turn, our communities succeed. Thriving communities create thriving economies. And local economies that have a hard time accessing capital and credit will have a hard time finding opportunities for growth.

We’ve always been proud of our lending and credit underwriting practices and we will continue to stay true to who we are despite CECL. At the end of the day, CECL may seem like a banking problem. But, in reality, it’s a problem that will affect everyone in some shape or form. Our focus is on listening to our customers, refining our strategy where needed, and continuing to be a reliable partner to our communities. It’s going to be up to mid-size banks like Valley to step in where the community banks can’t, and where big banks won’t, to help people and communities get the services needed to be successful.