CECL Preparations Yet to Begin in Earnest at Many Banks, Credit Unions
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Many financial institutions have yet to begin in earnest their preparations for transitioning to the current expected credit model (CECL), a recent poll by Sageworks suggests.
More than half of financial professionals attending a 2017 summer webinar, “CECL Transition Planning and Execution,” said their financial institutions have completed none of the following four major activities related to a transition:
• Implementing a transition governance structure
• Implementing an execution governance structure
• Performing data assurance exercises
• Selecting methodologies for each segment
About 1 in every 5 financial professionals surveyed said their banks or credit unions are assessing data adequacy, and a similar ratio said their institutions have implemented a governance structure for the transition. Much smaller shares of the webinar audience said their institutions had begun selecting methodologies for various loan segments (4 percent) or implementing a structure for governing the execution of CECL transition plans (4 percent).
“Regarding the CECL transition status, respondents selecting specific answers appear to be focusing today on building governance structure and assessing their data adequacy,” said Abrigo Executive Risk Management Consultant Tim McPeak. “These choices are understandable and appropriate relative to timelines for implementation. What is most striking, however, is the large number of respondents choosing “None of the above.” This suggests that many institutions have yet to begin their preparations for CECL in earnest.”
Financial institutions often ask what their initial steps should be to prepare for the CECL change, which takes effect as early as 2020 for SEC-registered banks. One of the first steps regulators have advised financial institutions to take is to identify the functional areas within the bank or credit union that should be involved in CECL implementation, and it appears that webinar attendees have already begun doing this in large part.
Nearly half of the respondents to another poll question said that the credit area of the financial institution currently owns the ALLL process, while other areas such as accounting (29 percent) and finance (24 percent) received less frequent mentions. However, respondents seemed to indicate ownership will change as they implement the new credit-loss standard. Under CECL, functional areas that respondents said will be involved and the percentage identifying each were:
• Credit – 91 percent
• Accounting – 68 percent
• Finance – 58 percent
• Treasury – 22 percent
“What is noteworthy here is that respondents clearly indicated that more functional areas of their institutions will need to be involved in the estimation of the ALLL under CECL,” McPeak said. “The ALLL process today is often siloed, in that one functional area is the primary owner of the process (i.e., credit vs. finance). Though other areas may be providing input to the estimation today, it is anticipated that the process will evolve to be more cross-functional under CECL.”