Tag Archives: tax reform

Good news (big banks) and bad news (community banks) from U.S. tax reform & CECL changes

“While there has been much written about the impact of the recent tax reform law on banks’ bottom lines,” the ABA Banking Journal writes, “less has been said about what it means for financial institutions in the capital markets. Specifically, if bank capital is a form of currency, how is tax reform shaping the deal-making environment for community banks to midsize and regionals?”

Brian Nixon provides some answers in “Tax Reform and table-setting,” in the recent ABA Journal.

Sadly, the bottom line is, the U.S. tax reform recently passed may help community banks in a very indirect way — by making access to certain types of capital more readily available — the same rule changes, and other regulatory changes scheduled for 2018-2019, will help large institutions much more. But the direct impact, when combined with 2018-2019 changes in capital classification requirements by the Federal Reserve, will have a much stronger, and more direct, impact.

community banks - Federal Reserve - CECL Implementation Roadmap 1For example, a 2017 analysis by Stonecastle concludes that when one combines tax reform with new tier-2 financing requirements. community banks “will see an “increased need for capital (so that banks can maintain their well-capitalized status). Even further, he expects that Tier 2 suborbinated debt “is likely the most cost-efficient form for this additional capital.” (Right-click image for larger view.)

Smaller banks “should fully appreciate” what the coming change essentially means: “as much, if not greater, [obstacles] for bank regulatory capital compliance.” More than 1,000 U.S. banks (heavily concentrated in small and community banks, “will struggle to maintain their capitalized status” when new standards for CECL (Current Expected Credit Loss) accounting are implemented.

Community banks “may have no alternative but to raise expensive equity to meet regulatory compliance.”