This week’s GAAP Flash is all about banking. It includes articles about the proposed CECL model, loan impairment under ASC 310 and ASC 450, and other recent accounting news about banks.

Standard Chartered CEO Braces for More Bad News (February 19, 2016) – The Wall Street Journal (@wsj)

When Bill Winters started as CEO of Standard Chartered PLC, the bank already had deep problems stemming from years of rapid expansion and a commodities downturn. However, Asia’s downturn and volatile markets threaten to derail his plans to shed businesses and cut costs. “We think that the outlook for impairments remains highly uncertain, with extreme volatility in the oil prices seemingly driving short-term moves in sentiment and/or expectations,” Ian Gordon, a bank analyst at Investec, wrote.

How It’s Relevant: This article highlights the volatile environment and issues that banks are currently facing (and that auditors need to consider in their risk assessments). Standard Chartered is dealing with bad loans and increases to the provision for loan losses under ASC 450 and ASC 310, which more than doubled from a year ago. Analysts are also looking at the bank’s exposure to commodity companies and the ultimate settlement of outstanding lawsuits. These issues have forced the bank to cut costs and restructure assets to bolster regulatory capital.

Banks Brace for Potential Energy Losses (February 24, 2016) – The Wall Street Journal (@wsj)

Banks are admitting what investors have long suspected: The energy bust is likely to result in major losses. Wells Fargo & Co. set aside $1.2 billion in reserves, about 10% of total loan-loss reserves, for probable losses tied to oil and gas loans. In addition, the bank’s nonaccrual oil and gas loans – nonperforming loans on which the bank isn’t sure it will collect – totaled $844 million at the end of 2015, up more than 10-fold from $76 million at the end of 2014.

How It’s Relevant: Just a few months ago Wells Fargo’s CFO said the impact of energy loans going sour was “relatively immaterial” to the bank. Wells Fargo was not alone. Many banks were downplaying their exposure to energy not that long ago. Well, times have changed, and banks are now beginning to bolster loan loss reserves under ASC 450 and ASC 310. But is it enough? Analysts have also started to raise questions about billions of dollars in so-called unfunded commitments to the energy sector. In these cases, the bank has promised, but not yet lent, money to companies. Under U.S. GAAP (ASC 450), companies also need to record a liability if losses on these unfunded commitments are probable and reasonably estimable, even though the bank has yet to make the loan.

Community Banks Concerned about FASB Changes (February 8, 2016) – Accounting Today (@AccountingToday)

A group of community bankers from the Independent Community Bankers of America (ICBA) met with the FASB to discuss their concern with the upcoming impairment standard on credit losses. They warned the FASB that the Current Expected Credit Loss, or CECL, proposal could irreversibly damage the ability of community banks to continue meeting the needs of local customers and communities.

How It’s Relevant: Community banks have reason for concern. That’s because the CECL model would require banks, big and small, to record a provision for loan losses on expected losses instead of incurred losses as currently is required by U.S. GAAP. Theoretically, a provision for loans losses would be reported at issuance of a loan under the proposed CECL model. Estimating the provision for loan losses under ASC 450 and ASC 310 is already highly judgmental. CECL takes that judgment to the extreme and, in my opinion, increases the possibility of earnings management. It also impacts regulatory capital, which banks are already struggling to maintain at adequate levels. Regulators have said the new CECL model would cause a projected 30-50% hike in the loan-loss reserves, according to the ICBA.

Crisis-Era Mortgage Attempts a Comeback (February 1, 2016) – The Wall Street Journal (@wsj)

Wall Street wants to bring back the “low-doc” loan. These mortgages, which are given to borrowers that can’t fully document their income, helped fuel the recent housing crisis. Now, it appears that big money managers are lobbying lenders to make more of these “Alt-A” loans.

How It’s Relevant: Here we go again! Why would banks even consider going down this path again? Well, in this low interest rate environment, banks are searching for yield. Many of these loans come with interest rates as high as 8%, compared with an average of around 4% for a typical 30-year fixed-rate mortgage. Although these loans cannot be “packaged” into typical securitization deals, banks are finding eager buyers in private-equity firms, hedge funds, and mutual fund companies.

Big Banks are Fleeing the Mortgage Market (February 12, 2016) – MarketWatch (@MarketWatch)

Banks originated 74% of all mortgages in 2007, but their share fell to 52% in 2014, according to the most recent data available from the Mortgage Bankers Association. And it could go even lower.

How It’s Relevant: Why? The article points to an increasingly strict regulatory environment. Quite frankly, it doesn’t make sense for “big banks” to be in a low-margin business. That leaves community banks and credit unions to fill the void, but they are strapped with new capital requirements as a result of Basel III. As a result, online lenders, so called “nonbanks,” are increasing their market share. In 2015, four of the top ten originators were such entities, according to data from Inside Mortgage Finance.