How Much for a CECL-Compliant Model?
Opportunity is too often much like bait. A little bit of sweet can bring the roaches from the walls. That was evident in one banker’s concern voiced to the FASB panel at last week’s (2/4/16) roundtable on CECL in Norwalk, Conn. The banker complained that developing a CECL-compliant ALLL model would be too costly for small banks. He noted that a vendor had priced developing a CECL model for his bank at $100,000. (Listen to the February 4 FASB meeting Part 1 & Part 2.)
His comment gave members of the FASB panel another chance to reinforce what they have said many times, that there will be no regulatory dictate on what model you must employ to be compliant. The model you choose – and will be judged on by your regulators and advisors – will be based on your bank’s size, the nature of your loan portfolio and its past performance, economic factors and the projected needs of the communities you serve.
Determining your current expected credit loss model will be the conclusion of a process that begins with amassing the substantial amounts of data you will need to project future loan portfolio losses. And that is what is at the heart of the software solutions that those of us in the business of helping banks automate their allowance calculations have been developing and marketing. Yes, you will need more data. Yes, you will need to include consideration of economic factors and how they are likely to impact your portfolio. And yes, you will need your data to be accessible and current so that you can make what FASB has termed “reasonable and supportable” decisions. Automating the process makes all the additional work considerably more manageable, and in most cases, will be more than a convenience but a necessity.
In the long run, CECL is likely to prove more than a burden. It will be useful tool – and not to predict the future. Who can do that? It’s similar to budgeting. How can you know what will happen a year, two or three from now? But what a budget, and what this new method, can help you do is control your future. By gathering information and using these tools to project outcomes, you can modify your activities, adjust the way you conduct business to avoid problems and enhance performance.
At MST our focus is as it has always been, on working with you to help you manage your allowance and in the process reduce risk and thereby improve your bottom line. Let us help you through this transition.