ABA’s Cost-Benefit Appeal for CECL: Well Conceived, Tangible Solutions Follow Up
**Please check our most recent blog post regarding the latest changes to the FASB deadlines.**
A follow-up to the April 20, 2016 ABA Letter
Among the many enhancements and functionalities to address CECL that we have been developing for our core product, the Loan Loss Analyzer platform, one took center stage on April 20 as the industry considered the latest American Bankers Association appeal regarding the new standard. In a letter to the top executives of the OCC, FDIC and Federal Reserve asking them “to take an active and detailed role in the FASB’s promise to ensure an in-depth cost analysis is performed,” the ABA noted:
“At a minimum, much more granular analyses will likely be expected or required, and certain auditor and regulatory publications have already suggested that correlation analysis will help link forecasts of key economic drivers (such interest rate increases) to credit loss estimates for various types of loans.”
We fully supports the ABA’s initiatives toward, and the need for, simplification and efficiency in what CECL will require of financial institutions. We also understand that FASB’s current version of the standard will remain essentially in tact, and we have been focused on developing ways to help banks prepare, including features and functionality that simplify the process and make it more efficient.
That includes addressing the need to analyze the relationship between various economic conditions and an institution’s future loan and lease losses. We know that most community banks and credit unions don’t staff economists, so in conjunction with noted economists, we developed theVirtual Economist. As a companion module to the Loan Loss Analyzer, the Virtual Economist provides an easy way to look at a wide set of economic variables and understand how relevant metrics will influence portfolio performance. It allows the institution to select and track the economic data relevant to its locale and portfolio, then understand how its loan experience correlates to those economic trends.
The ABA’s letter is structured around four key areas of concern it suggests FASB address in a cost-benefit analysis. And we have been developing solutions to address each area:
ABA: New databases will need to be developed and managed: “ . . . a realistic CECL implementation . . . will likely require databases many times the size of those currently maintained by most banks . . . “
Abrigo: The Loan Loss Analyzer is the bank’s data warehouse, collecting data from the institution’s core and other data systems. Through a tailored import it normalizes data between the systems and makes data available on demand.
ABA: Quantifying forecasts of the future will require more sophistication: “At a minimum, much more granular analyses will likely be expected or required . . . “
Abrigo: The Virtual Economist streamlines the identification and determination of strength of correlations between loan-level data and any number of economic indicators to provide documentation and support for forecast adjustments.
ABA: Different credit metrics will be needed: “The industry will need to respond . . . by embedding wholly new metrics into the internal controls of this reporting process.”
Abrigo: Use the Loan Loss Analyzer to run parallel allowance calculations and test different methodologies, such as PD/LGD and migration analysis, for compliance and to determine the CECL-compliant model or models that best suit the institution and its portfolio. We call this “shadow loss analysis.”
ABA: Auditing procedures will likely change: “. . . will increase the cost of the audits and the level of supporting documentation a bank will be required to produce in order to support its assumptions.”
Abrigo: The Loan Loss Analyzer provides myriad reports and automatically documents the allowance estimation process. Institutions using the LLA report substantially easier and faster reviews from their auditors and regulators than before they implemented the LLA platform.
Our sole focus is the allowance. We remain at the forefront of the industry during this period of transition, helping our clients respond to CECL, developing well conceived, tangible expected loss solutions.