Pub. 6 2018 Issue 2

www.uba.org 22 Many bankers say they sometimes wish for more moderation from regulators and accountants. It doesn’t look like that is going to happen with the new current expected credit loss (CECL), but there are some interesting things to think about here. To add some insight, we tackle the subject of loan duration and how it affects loan loss reserves under the new CECL guidance. Credit exposure models incorporate historical data, current con- ditions and forward looking macroeconomic forecasts (includ- ing interest rates) to measure expected credit losses. Historically, delinquency rates have been shown to increase following rate tightening from a low rate environment. This is because borrowers’ revenues generally do not keep pace with increased debt service. In a rising rate yield curve environment, fixing loan rates sta- bilizes debt service. That reduces the stress on credit associated with deteriorating debt service coverage. Credit models that incorporate interest rate sensitivity will typically calculate lower expected losses for fixed vs. floating rate loans. So, what can community bankers do with this situation? Interest rate hedges are widely used by banks to safely offer longer term CECL and Long Term Loans By Jeff Goldstein