The End of the Educated Guess - Part Three

Posted on May 5, 2017 at 2:00 PM by Baker Hill

Lenders already have practices and policies in place to govern ALLL, so all that really has to change are the inputs—and the way organizations think about estimating losses. The fundamental concept, however, is the same: take all reasonable steps to predict the future state of the portfolio.

Larger organizations as a whole are better positioned to make the transition to CECL because they have plenty of data to drive the new calculations and enough expertise on staff to manage the associated IT tasks. Smaller lenders like community banks vary in their readiness; some, such as those with a high concentration of CRE loans, have already been collecting most of the data points needed to feed an expected-loss forecast, while others will be starting from scratch.

If possible, it is best to run CECL models now so multiple tests can be performed and systems and processes can be tuned before the standard becomes mandatory and penalties go into effect.

Context, Clarity, and Confidence with CECL

Implementing CECL will drive banks to collect more data, build more effective processes, and develop more robust methodologies. The key word here is more.

But more is not better by itself, and many organizations have learned the hard way that a lot of data does not necessarily equal a lot of insight. Data needs to be placed in context to be understood, and it needs to be understood in order to drive better decision-making. That is the aim of CECL—to help organizations gain a fuller understanding of why previous loans behaved as they did so the behavior of future loans can be predicted.

The end result for banking leaders should be greater confidence in their institutions’ ability to withstand fluctuations in the economy and greater clarity on the risks associated with their decisions. Although change is never easy, the pay-off for organizations that do a good job of implementing CECL will be better decision-making and, as a result, lessened risk.

 

Be sure to check out Part One and Part Two of Series One!  

Topics: Market Trends, Risk Management, Pricing & Profitability

Baker Hill

Written by Baker Hill

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships. Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions. Explore our solutions below for more information on how to generate sustainable growth, minimize risk and increase profitability.

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