CECL: Get More Out of Your Investment than Compliance
You’re investing a great deal of time and money preparing for and implementing your CECL solution. You should get a lot more out of it than compliance. There are many ways to leverage what you’re doing – the data, the processes, the analyses – to enhance your business.
And once your auditors and regulators have approved your CECL methodology, your data and processes will be validated. You’ll know you have broad, accurate information on which to base a series of analytical activities you can use to improve the performance of your portfolio and other areas of your institution.
Better loan decisions: CECL requires you to segment your pools according to shared risk characteristics, and potentially do so more granularly than you do with your current allowance. That better understanding of your portfolio will help you make better decisions about your lending in the future. CECL also requires you to assess the future, to adjust your allowance based on a better understanding of employment and other economic trends in your marketplace and nationally, which will also help you make decisions about products and borrowers.
Product decisions: CECL will give you more information about which types of lending are likely to suffer the heaviest losses, not only based on your history but on future expectations, environmental and macroeconomic factors. Does the yield on a particular type of loan justify its expected future losses and the associated reserve?
Loan level information: CECL requires you to understand your borrowers and their loans from origination at the loan level. You will also have loan-specific information for loans that don’t qualify for a pool and must be analyzed for expected losses individually.
Up-front analysis: CECL requires you to assign an expected loss and related allowance for each new loan you issue. Not only will your allowance have you better able to handle expected losses, the risk analysis you do to understand your expectations will help you avoid losses.
Business unit analysis: Are your expected losses on all covered financial instruments and the related allowances equal across the board, or concentrated in a particular branch, business unit or lender? The more thorough assessments and data requirements of CECL will render specifics that will allow you to target units or lenders for improvements.
Stress testing: Whether you use information from your stress testing for CECL or vice versa, what you learn from one can be used for the other. Determined Probabilities of Default (PDs) and Losses Give Default (LGDs) can also be used to feed ALM models or more complex DFAST-style stress tests.
Capital planning: CECL is likely to increase your allowance substantially. Some experts contend the balance sheet focus will shift from capital to reserves. Your CECL estimate will be an essential tool for effective capital planning.
These are just seven ways that CECL can actually benefit your financial institution.
For help with CECL understanding, planning and implementation, contact us.