CECL: How to transition from theory to implementation
One of the challenges bankers often cite about implementing the current expected credit loss (CECL) accounting standard is knowing where to begin the process. Controllers, senior credit analysts and administrators, and others involved in calculating the allowance for loan and lease losses (ALLL) have heard and read about the changes to the standard for accounting for credit losses for more than half a decade, and yet “CECL paralysis” is a primary hurdle for many involved in the transition efforts.
Having a CECL action plan that lays out steps to prepare for and comply with the Financial Accounting Standards Board’s (FASB) methodology for estimating allowances is one way to help overcome that paralysis. The action plan provides a road map that can be adjusted for your institution based on its size, staffing, and deadline for compliance. The updated accounting standard is effective in less than a year at banks with the earliest deadlines. Nevertheless, many other banks know that gathering years of loan data, selecting a loss methodology, and refining their estimates will take long enough that CECL is on the agenda in board rooms across the country.
CECL training helps transition
Another sound option for lenders looking to kick-start CECL implementation is to attend hands-on training that provides the opportunity to dig into the standard and move beyond simply reading about it. Having the chance to evaluate different loan segmentation options and loss rate methodologies and to discuss various ideas about the best way to implement CECL can set off lightbulbs and perhaps avoid missteps.
John Richardson, Credit Administration Analyst at Bank of Washington in the St. Louis area, says his financial institution was already using software that automates the allowance calculation under current U.S. GAAP and is capable of running the estimate under CECL when he attended a CECL Transition Workshop in November. However, he had not really dived head first into implementing CECL beyond spending a significant amount of time attending webinars and seminars and reading up on the various guidance that has come out about CECL.
“A lot of what I’d been reading and hearing was very theoretical, so I was having trouble wrapping my head around the notion of ‘Here’s how it works in your world,’ ” he says. “Before I went to the seminar, we read a lot about CECL and talked a lot about CECL, but we hadn’t really been able to translate that research into practice.”
Abrigo, the technology provider behind Sageworks ALLL and MainStreet Technologies (MST)’s Loan Loss Analyzer, will host CECL Transition Workshops in six locations this year that will provide the same caliber of hands-on case studies and training that Richardson received. The workshops are relevant for institutions regardless of whether the institution subscribes to Sageworks ALLL, MST’s Loan Loss Analyzer or neither.
The workshops combine a morning panel discussion about approaches to CECL with an afternoon of attendees working together (in some cases, working on laptops pre-loaded with CECL solutions and case studies) to discuss the inputs, assumptions, and decisions required for producing an allowance for credit losses. One change this year to the workshop setup is that registrants will receive a short survey upon registration to help determine which agenda track would best fit his or her financial institution. The goal is to make sure participants get the kind of training and advice out of the workshop that is most beneficial to their particular situations.
CECL training makes abstract concepts tangible
Regan Camp, Abrigo’s Senior Director of Advisory Services, says CECL Transition Workshops help demystify CECL for those bankers who have been reading and hearing about it for so long that they have gotten a “Chicken Little” mentality: That the sky is falling and they don’t know where to run. The workshops will also, he says, keep bankers focused on the relevant aspects of implementation so they don’t get caught in “analysis paralysis,” where they get caught up in less important details at the expense of making progress on implementation.
“It’s one thing to understand all of the basic conceptual approaches” related to CECL implementation, Camp says. “However, there’s often a disconnect between the theory of it and the practical application of it. There are a number of different inputs, assumptions, and decision points that institutions need to make to actually implement it that are rarely discussed” in CECL educational programs.
Richardson says that the November workshop really helped to make the abstract concepts of CECL much more tangible. “The case study materials provided were helpful, because they walked us through step-by-step and encouraged discussion within the groups. Consultants and other staff were walking around to provide assistance for the times when our group got stuck or had questions,” he says. “I really enjoyed the fact that we were able to work as a team to process through some of the subjective questions, too, because so much of CECL is subjective. In fact, one of the things they said in the panel discussion was that so much of this implementation is going to be how we document the decisions we make as we implement the standard. So we discussed as a group: Which of these outlier readings can we remove, and how do we justify that? What factors do we apply here? What forecasts do you think are reasonable? Just thinking through that process was very beneficial.”
Banking regulators have repeatedly said that financial institutions should document their processes for determining their methodologies and for changing their methodologies, as well as documenting their process for determining the amount of the allowance.
Abrigo’s CECL Transition Workshops begin Feb. 26 in Kansas City, Mo. Additional workshops will be held:
• Feb. 28 in the Los Angeles area.
• March 12 in Nashville
• March 14 in Dallas
• May 14 in Minneapolis
• May 16 in Boston
For information and registration, learn more here.