CECL: “How Do I Get Others to Care?”
MST regularly partners with the Risk Management Association (RMA) on educational programs on the allowance and CECL for bankers responsible for their institutions’ allowances. An open forum at our most recent RMA-sponsored program in Boston, Mass., led to an extended discussion about a lack of concern about CECL among bank departments not directly responsible for allowance estimates.
Forming a CECL Steering Committee is One of the First Steps in CECL Preparation
As has been widely asserted by industry experts, one of the first steps in preparing for the transition to CECL is to assemble a CECL steering committee. Some bankers, however, are reluctant to do so. No one else at their institutions really cares, some have told us. And besides, the allowance is their purview, and they are hesitant to surrender decision-making to those who don’t understand the nuances of the allowance as thoroughly as those responsible for the quarterly ALLL estimations.
Understood. But the reasons for a committee far outweigh the risks of starting your CECL transition without one. Yes, you will remain in charge, oversee the transition process; but, because CECL’s impact will extend to virtually every department in the bank, your transition demands the input of others, including top executives. So, forming a steering committee remains at the forefront of the list of CECL transition steps, second only to reading and gaining a thorough understanding of the CECL guidance.
Seven Reasons to Form a CECL Steering Committee
1) CECL is a big deal. Its impact will be substantial and felt throughout your institution. How other departments operate in the future will be affected. Consequently, they need to be involved in the process, so they can provide input from their perspectives then make adjustments based on the decisions being driven by CECL.
2) Banks are notoriously siloed. Different departments have and retain different types of data. CECL will require a much broader and deeper set of data, and it is likely there is valuable data siloed in other departments.
3) CECL may very well impact the institution’s lending policies and procedures. Your transition committee needs representation by those who set those policies.
4) Information you can leverage from stress testing is reason enough to include someone from the responsible department on your CECL steering committee. CECL requires projecting future loan performance and your projections should be consistent with stress testing findings.
5) Will your CECL transition require outside expertise in the form of third party support? That decision will include budget considerations, so someone from budgeting needs to be on your steering committee. Even if you decide to handle the process internally, you will likely need additional resources and/or tools.
6) A top executive – a CEO, CCO or CFO – should be on your committee. If the transition has the attention of the boss, others in the bank will wake up to the significance of CECL.
7) Another reason to include a top executive: The personal income of many bank executives is tied to performance. CECL is going to impact the bottom line, so they should at least be kept abreast of the transition and how various approaches or methodologies will impact earnings or capital.
With representatives from various departments on your committee, you will have accomplished a major responsibility in your transition to CECL, to level-set and educate bank departments on how CECL will affect them. Finance, policy, lending, IT – all have a vested interest. And when they realize the breadth and depth of CECL’s impact, they will care.
Read more in our blog Forming a CECL Steering Committee 101.
About the Author
Regan Camp is the Managing Director of MST Advisory Services, leading a team of subject matter experts who assist financial institutions nationwide in accurately interpreting and applying federal accounting guidance. He has established himself as a nationally recognized speaker, writer, thought leader and trusted advisor, with a primary focus on the Allowance for Loan and Lease Losses (ALLL) and Credit Risk. Having worked closely with hundreds of financial institutions nationwide of varying sizes and complexities, Regan offers his clients a unique combination of experience and perspective, as he works closely with each institution in developing sound and defensible methodologies, policies and procedures. His lauded ability to simplify the complex has especially contributed to the appreciation and success of those with whom he has worked.
