Crossing the CECL Goal Line

It’s first and ten at your own 20-yard line, the first drive of the new season. You’re the offensive coordinator responsible for developing the tactics to get down the field and into the end zone. And now, there’s a whole new set of rules governing what you can and can’t do to get there. Do you attack with a wishbone offense, a spread offense, traditional pocket passing?  Will you run or pass on first down?  Can your team execute a long pass?  Will there be audibles? To add to your anxiety, the referees are calling their first game under the new rules. They have given you some guidance on what their focus will be, but have also been vague about calls. Can you avoid being penalized?

Does this daunting scenario remind you of what you face as you implement the Current Expected Credit Loss (CECL) rules for the allowance at your institution? Historically the rules have been much more prescriptive: analyze your historical losses and apply qualitative factors to calculate your loss reserves.  The rules were well defined and years of experience taught you what you could and couldn’t do. There were penalties for over or under provisioning, but for the most part the process was defined and established.

A paradigm shift is often difficult and troublesome. The allowance paradigm is moving from a historical methodology to a guidance-based expected loss concept. More than before, there will be no specific “right” answer. More than guide you, the referees and rules will be there to tell you when you do something wrong. And the penalties for being wrong will work to set you back, to extend the time it takes to finish or fix your process.

As in football, the key to achieving success in implementing CECL is preparation. Institutions need to research, analyze, gather, and review data, – and start practicing for the CECL process sooner than later. You need to have multiple players prepared to step up in case of an injury and players from across the institution working together to achieve the complex goal before you. You have to stay focused; distractions may cause you to fail. You need contingency plans and to practice them. And you must have all your data, processes and documentation in place so that when CECL is your new reality you will know how to attack it.

Institutions that put off or inadequately define how CECL will work for them will end up having to perform and create on the fly. The risk of failure will be high. They will have no reasonable certainty about their outcomes; they might get to the end zone with an allowance based on CECL but it will lack the assurance that comes with practice, knowledge and research. They will be calling audibles to try to solve issues that arise. Players and coaches will be exhausted from the rigors of the drive and will be more prone to errors for the next time they line up on their 20 to head down the field.

So prepare. Have a game plan. Analyze your data and do your research. Only through preparation can you minimize risk and improve your chances of getting across the CECL goal line.

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Author Shane Williams is an Advisor with MST Advisory. Shane is an experienced financial and risk professional with over 25 years of experience. His experiences range from banking to software development and delivery, to consulting for major financial institutions.

Shane’s experience in financial services traverses a wide variety of positions, from Branch Manager to Commercial Lender to Asset Liability and Portfolio Manager to Treasurer. He also has experience in the software world as a creator and deliverer of risk management products used by financial institutions across the globe. In addition, he has Big 4 consulting experience helping financial institutions from the systemically important to community banks in regards to risk, reporting, and regulatory issues. To contact Shane email [email protected].