CECL is coming! Are you prepared to leverage this new model or prepared to scramble? CECL — the Current Expected Credit Loss model — comes into effect for SEC institutions in 2020 and if you’re not already working to understand the challenges of CECL, you should be preparing how to adjust your methods to remain compliant and competitive.
Why the big deal for CECL?
CECL is expected to have a major impact on costs associated with your ALLL—it's going to change the way you prepare and edit the ALLL, it's going to change the way investors analyze it, and most importantly it's going to change the way your institution manages its capital. It's not an understatement to say that CECL is going to require significant changes to the way you maintain and analyze your data.
Learn everything you’ve ever wanted to know about CECL in this excellent report from the American Bankers Association: CECL Backgrounder.
Key steps to prepare for CECL
Put your data to work for you
Knowing as much as possible about the data points you collect now is the first step in identifying potential gaps in the data you'll need to collect under CECL. Perhaps the biggest change in how you look at your data is that CECL is asking you to use it to forecast risk and create detailed ALLL based on the vintage of loans, terms of loans and loss accumulation periods. In short, your data is no longer just historic, it's also your crystal ball.
TIP #1: Collect historical data now on as many loan types as possible and start identifying patterns to build the best prediction analysis tools possible.
More data does not necessarily mean more insight. Data needs to be placed in context to be understood and it's that understanding that will drive improved decision-making. In fact, that's at the core of CECL: the guidance is designed to help you better understand your loan behavior and how to make more successful loans. CECL is an opportunity for you to improve the way you do business.
TIP #2: Use data to your advantage and make your expected-loss model more accurate.
Rethink your calculations
There are a lot of benefits to the new CECL regulations but there are also plenty of challenges. One of the biggest challenges revolves around how you calculate your predicted losses. You likely already use quantitative factors to review losses. CECL is going to require you to use qualitative factors as well.
TIP #3: Identify what specific qualitative factors have the biggest impact on your CECL calculations.
TIP #4: Define those factors so you can consistently forecast credit losses more accurately.
Qualitative factors are by their nature subjective. Luckily the regulatory community is giving a lot of guidance on how to select the right qualitative factors for your institution and CECL allows flexibility to pick the ones that are best for your operations.
TIP #5: Leverage the flexibility of CECL with calculation factors that work best for you.
CECL doesn't require a one-size-fits-all approach to your data calculations. However, once you establish your quantitative and qualitative factors, it's important to be consistent and as objective as possible. In short, decide what works for you, work it consistently, and then work to optimize it over time.
TIP #6: Use a qualitative scoring matrix to preserve objectivity in your calculations.
Review your systems and models now
You have less than three years before you have to fully comply with CECL regulations. Smart institutions will start making changes now so that when CECL comes into effect they aren’t just ready to comply—they are ready to thrive. CECL gives lenders the ability to exercise judgment in your calculations and the factors used in those calculations. That flexibility is a blessing but it also means you need to take more time to carefully consider how you are developing your estimation methods.
TIP #7: Evaluate your ALLL automation systems and make sure they are up to CECL standards.
TIP #8: Run CECL models now while you have time to perform multiple tests.
TIP #9: Consider your loan-related costs and plan now for how you will quantify them. Gradually implementing new systems and processes is more cost effective than rushing through them. Plan now and save money.
Don’t just prepare to comply, prepare to leverage
CECL gives institutions a lot of flexibility and should improve the way you manage capital risk. Learn how CECL is different from historic loss analysis, how your business needs to adjust, and what you can do now to ensure your business remains compliant and competitive.
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