Are You Looking for an Off-the-Shelf CECL-Compliant Solution?
CECL is rife with complexities, and as the implementation date for the new allowance accounting standard nears, it is understandable that lenders struggle with how to make the transition. As well, resources are limited; the closer the implementation dates, the more difficult it will be to find and engage transition expertise.
Some observers have predicted the emergence of off-the-shelf solutions that could be implemented as CECL-compliant. But allowance experts warn against such expectations.
“I don’t believe anyone can credibly offer an off-the-shelf solution,” said Dorsey Baskin, a long-time consultant on the allowance with Grant Thornton, and now a consultant working with MST to advise lenders on their transition to CECL. “Any compliant system will have to be built on existing systems, processes and data. Unless you can think of a system that could be built entirely on the base of the existing data that everyone has available today, I don’t see how a claim could be made to have a compliant system ready to use out of the box.”
“The concept of an off-the-shelf solution for a banker sounds great, but it would have to assume every bank does the same loans and has the same structure, same terms, same underwriting,” added MST Advisory’s Shane Williams, an allowance subject matter expert.
“Maybe it is possible to come up with a standard CECL compliant solution for credit card loans, payday loans, and other short-term loans,” Baskin considered. “But even with these I would be very cautious about making a claim for a ready-made solution. For example, for credit cards there are at least a couple of ways to derive the life of the loan balances existing at the balance sheet date.”
Rather, Baskin suggests banks start the transition process by assessing the potential impact of CECL. “Seems to me you have to figure that out first before you determine how to do it, that is, before you can adopt a methodology.”
Baskin argues that, like the FAS 5 standard before it, CECL will be subject to interpretation and modifications for years to come.
“It is likely to evolve fairly quickly over next couple of years as FASB, the Transition Resource Group and other industry groups consider different issues. It will make it difficult to implement a standard methodology when CECL is something of a moving target.
“At this point, marketing an understanding of CECL and selling tools and system modules that are flexible and can build on existing practices is more credible than off-the-shelf,” he concluded.
MST has assembled a team of allowance experts under the umbrella of MST Advisory to provide the support lenders need to develop and implement CECL-compliant methodologies. They are working with banks and credit unions during the transition period to assemble data and design methodologies built around the particular requirements and characteristics of each institution and its portfolio.
MST provides a comprehensive set of ALLL and CECL advisory services and software solutions. Tailored to your financial institution’s needs, Advisory services address all aspects of the allowance, including projects required for a successful, efficient transition to estimating under the Current Expected Credit Losses (CECL) standard.