To the extent of what they can, financial institutions have been processing the requirement demands being cast upon them with the new “Current Expected Credit Loss” (CECL) standard to be implemented. Through a process assessment, most institutions have slowly started to form a picture/plan of how to satisfy the requirements. The 2006 Interagency Policy Statement notes, “The loan loss allowance should take into consideration all available information existing as of the financial statement date, including environmental factors such as industry, geographical, economic, and political factors.”
There have been continual conversations within the financial institution industry as how to best prepare for the upcoming regulatory changes required by CECL (Current Expected Credit Losses). While various methodologies are being considered, the Expected Loss or PD/LGD approach has been discussed in many of those evaluations.
There certainly are several schools of thought as to what needs to be addressed in preparation for CECL. At this point in the game, implementing CECL is starting to become a reality. Most banks have started their preparations but come to a screeching halt when faced with tackling what is quickly becoming known as the hardest challenge of CECL: defining economic drivers.
My advice? Do the prep work and tackling the hard stuff won’t seem as intimidating.