CECL Is a Process Not an Event
CECL should be looked at as a process and not an event. We transition today toward CECL implementation on principles-based guidance. But through time and eventual practice, auditor opinion, and regulatory enforcement, the allowance will evolve to a more intense and sophisticated process, manipulating our assumptions, analyzing our numbers, understanding our trends as we continually refine our models and methods to enhance our knowledge and improve portfolio performance.
Historically the allowance has been a quarterly activity. You generate a number, then put it aside for 90 days. But with CECL the allowance is going to be much more volatile. It will require an ongoing review process, much more than reaching a number. You’ll have to manage the process regularly and continually, altering assumptions, considering changes in economic variables for forecasting, and adjusting life-of-loan estimates. With more control over what goes into your model, you’ll have to do more managing. Your allowance will always be evolving.
Implementing the new standard is just the opening foray into the CECL world. It will get more intense, much more detailed and focused. And that means it will get better. Right now, we’re fighting the fire to meet this deadline, but the years ahead will be driven by modeling and analyzing toward better results, not just in your allowance but for your portfolio.
It is comparable to the implementation of asset liability management (ALM) that came with the S&L crisis in the 1980s. We had to start reporting interest rate risk exposure, had to start modeling that. We had to consider floating assets against floating deposits to identify the risk. Now the process has been sophisticated to the point that you can tell what a single percent change in interest will do to earnings and shareholder value. The same will occur with CECL. We’re focused on meeting the basic requirements now, but in 10 years it will have evolved to where the analytics and assumptions around each loan will be more intense, and the result will be a much better idea of what is happening in your loan portfolio. That will lead to changes in how you model and how you estimate.
Learn how MST Advisory Services can help your institution transition to CECL with confidence.
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