Forming an Effective CECL Steering Committee 101
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With CECL (Current Expected Credit Loss) implementation virtually around the corner, financial institutions across the country are building their CECL Committees. Common questions that have surfaced include:
- What are my peers doing?
- Who should be involved?
- What should the CECL Steering Committee be doing?
- What if we do not form a committee?
Allow me to provide some answers.
Where are my peers in progress towards CECL?
Eighty-six percent of lenders responding to the 2017 CECL Survey of Financial Institutions report that they are having internal discussions and meetings on CECL. Thirty-six percent of respondents are evaluating third parties to assist with CECL, while 15 percent are testing potential CECL-compliant models.
Results from the 2017 CECL Survey of Financial Institutions
Who should be on the CECL Steering Committee?
Staying true to the flexible nature of FASB’s accounting guidance, different institutions will undoubtedly have differing approaches to CECL and their CECL Committee. Dorsey Baskin, Grant Thornton retired partner and Advisory Services Senior Advisor, proposes that financial institutions ask themselves the question “What processes and departments provide data to the allowance estimation process?” as a starting point for identifying departments necessary for a CECL Steering Committee. According to the Survey the only two departments represented across the majority of the respondents’ CECL Committees were Accounting and Lending, 91.4 percent and 68.82 percent respectively. Senior Advisor Shane Williams argues that financial institutions should also consider including members from Information Technology (IT), Allowance, Compliance, Internal Audit, Loan Review, Treasury, Internal Review (IR), Model Validation, and the Profitability Group.
After identifying the necessary departments, individuals from those departments will need to be chosen to participate and lead the institution’s CECL Steering Committee. The committee should not only reflect the previously mentioned departments, but should also include individuals such as the CFO, CCO, and Controller to provide leadership and ensure that the necessary actions can be taken to follow through with committee duties. In-depth technical knowledge of CECL, whether internal or external to the financial institution, will be imperative when defining and following through with crucial duties such as communicating with the Board of Directors, regulators, external auditors, and performing a Gap Analysis.
Results from the 2017 CECL Survey of Financial Institutions
United Bank, a $6.8 billion financial institution based in Glastonbury, Connecticut, is a leading community bank in New England with over 50 locations. United is currently meeting with their CECL Steering Committee to discuss the scope of CECL and how the guidance will impact each aspect of their institution. Nathan Kelley, VP of Credit Risk & Reporting, says their CECL Steering Committee has representatives from Accounting, SEC Reporting, Lending, Finance (ALM), Internal Auditing, Loan Servicing, IT, and Credit. While Kelley says that their Committee is “more informational right now”, United Bank has taken steps to create a timeline moving forward including having a CECL compliant methodology run in parallel with their current incurred loss model by the end of 2017 and having a concrete understanding of where their allowance calculation will be by June of 2018.
What should the CECL Steering Committee do?
A Gap Analysis has become a critical duty of a CECL Steering Committee in response to the overwhelming data needs of the incoming CECL guidance. At the macro level, a Gap Analysis is an in-depth look at where an institution currently stands in relation to where they should be in preparation for CECL. In terms of data, the goal of the analysis is to contrast a financial institution’s historical data, such as the fields listed in “Graphic 1”, against the data requirements of the various CECL compliant methodologies to come to an understanding of which methodologies would be appropriate given the data and which data fields the institution should start collecting.
Senior Advisor Shane Williams says, “We knew from the beginning that lenders would need more data than they employ to account for their allowance under the incurred loss model, and we knew they’d need a more granular approach to data, that is more types of data.” Abrigo’s Survey shows that currently 53 percent of institutions are in this Gap Analysis phase, while a mere 19 percent believe they are prepared for CECL’s data demands. In addition to data collection, a Gap Analysis should also reach into policy-building including defining policies and controls including credit modeling, process documentation, forecasting methodologies, and reviews of the allowance process.
The wide-felt impact of CECL across virtually all business units within a financial institution means that a strong Gap Analysis will require the identification of gaps within an institution’s processes, internal resources, and reporting practices. Resource gaps can manifest as gaps in knowledge, system integration, and even human resources such as staff availability. Process gaps are most often seen as discrepancies between an institution’s internal controls and procedures, such as an institution’s loan underwriting policies, and the process requirements for CECL. Lastly, financial institutions can see reporting gaps clearly in the comparison of their current disclosures versus the increased amount that will be required by CECL to accurately reflect changes in credit quality.
What if we decide not to form a CECL Steering Committee?
Moving into CECL adoption without a CECL Steering Committee would be the equivalent of attempting to hit a bull eye’s while blindfolded. Senior Advisor Shane Williams describes the absence of a CECL Committee as a “lack of buy-in” by the various departments and decision makers. Without individuals actively planning and preparing for CECL adoption, a financial institution effectively places the biggest accounting change on the backburner while the timeline for CECL planning is shrinking.
In summary, forming a CECL Steering Committee is an imperative step toward CECL compliance and developing a CECL model that best fits the institution. A CECL Steering Committee should be representative of all departments affected by CECL, include individuals with technical knowledge of the allowance process, and perform the necessary duties such as a Gap Analysis to ensure a responsible transition to CECL.