Another key consideration is data availability. Abrigo experts recommend that financial institutions perform a data gap analysis to determine how far back the community bank’s data currently goes. Lack of loan-level data can hamstring an institution’s methodology options. Additionally, consider how accurate the data is – do you trust it? Just because a community bank has a lot of data doesn’t mean that it’s quality data. Some community banks, for example, may have recently undergone a core migration. Others may lack quality control on data input processes.
“The standard gives you a lot of options on how to estimate future credit losses,” said Moore. “And those different options have different data requirements, including the amount data you need, how far back it goes, and what that data covers. Yet, even if you have data, that doesn’t mean that you have intelligence. If you have 15 years of granular data as a small commercial bank, there might not be like a material loss in that entire dataset, which wouldn’t tell you anything meaningful.”
If a community bank finds that it lacks data, has inaccurate data, or struggles with gaps in data, then it will likely need to make assumptions based on peer or industry data. For a successful CECL transition and to satisfy examiners, assessing the community bank’s data situation is a critical first step.
Availability of data should guide a community bank’s decision to leverage a particular methodology or methodologies. “It’s important to dispel the myth of, ‘I need to just try every option on every loan type’, especially when it doesn’t map out to what the institution does,” advises Moore. While considering various scenarios is generally a good idea, there is no expectation to model every possible permutation. For example, there will be some methodologies, like vintage analysis, that can be ruled out quickly because the institution’s data is simply insufficient, and discounted cash flow or remaining life would be a better approach.
Regardless of the methodologies a community bank selects, documenting the decision is critical. Not every methodology will work for a financial institution’s unique circumstances, and there will likely be significant back and forth during CECL committee discussions before a community bank determines the direction it wants to go in. Examiners, however, will lack the context of the discussions and strategies, unless these processes are well-documented. Community banks must ensure examiners understand why the institution ultimately decided on the methodology it chose.
Testing, discussing, and deciding does not happen overnight. Community banks must devote enough time to each of these areas.
