Five Things to Remember in Your Transition to CECL
Our 2018 blogs have focused on providing information relevant to your transition to CECL. In looking back over the year’s blogs to date, we revisit five things to remember in your transition to CECL.
1) There is typically no better place to start in preparing for CECL than your incurred loss methodology of today. In evaluating what might be leveraged from your current allowance practices, you just may save yourself a lot of time, effort and headache often associated with trying to “re-create the wheel.” After all, why completely abandon practices and policies your management, auditors and examiners are already familiar, when much might be leveraged moving forward to CECL?
2) The establishment of a strong CECL committee will prove key in navigating through the transition process. This committee should include strong executive sponsorship and diversified representation across the many departments at your institution that may influence and/or be affected by the new standard (e.g.; finance, credit, audit, IT, tax, loan ops, etc.)
3) FASB’s CECL Guidance tells us that “the Board did not prescribe one type of methodology for measuring expected credit losses.” The update is conceptual with few specific rules, which presents both opportunity and challenges to deciding on a model. There is typically not only one “right” method for a particular institution, often any of several will work. Hone in on those that are the most feasible, most suitable to your portfolio, to your loan practices, to your accessible loan data. You merely need to determine which is best and be able to support that decision.
4) Your model(s) and estimate(s) are only as good as your underlying data. It’s been widely asserted that “data is key.” An assessment of the depth, breadth and quality of your available data will go a long way towards helping you identify which way to go in your methodology elections.
5) 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.
Need help in your transition to CECL? Talk with MST today to learn out the CECL solutions offered to financial institutions. MST empowers banks and credit unions across the country to have confidence in their allowance estimations and transition to CECL.