Loan Pool Segmentation: Standing Pat or Making Changes for CECL?
Proper loan pool segmentation, already a critical issue in the incurred-loss method of calculating the allowance for loan and leases losses (ALLL), is expected to have even more importance under the current expected credit loss model, or CECL. Various methodologies for forecasting expected credit losses will require specific kinds of segmentation in order to execute them.
As a result, the CECL transition provides the opportunity to revisit loan pools for ALLL calculations. The standard (326-20-30-2) says that “Segmentations or pools should have similar risk characteristics. These pools should be as granular as possible while maintaining statistical significance”.
Segmentation Poll Results
During a recent webinar with for community banks on practical steps for implementing CECL, financial institutions indicated diverse perspectives on whether or not they are considering changing the way they segment their loan pools for CECL. A poll of webinar participants found that approximately 38 percent of respondents thought it was a good idea to make changes, whereas 19 percent said they plan to move forward with their current operations. A large share (43 percent) of survey respondents, however, expressed some of the uncertainty community banks have when it comes to CECL implementations. Among those respondents, 24 percent were unsure of whether they would change segmentation practices because of data requirements, and 19 percent were unsure because they had not yet put thought into CECL segmentation.
Learn more about navigating the CECL transition.
Reflecting on the poll results, Abrigo Risk Management Consultant Danny Sharman said, “I think these results are split pretty evenly. We are definitely seeing some different opinions out there, which is usually not typical. I think that we might be getting some different answers around segmentation as we get closer to the implementation of CECL and continue to get feedback”. When working with clients, Sharman recommends providing multiple segmentation codes so that the portfolio can be analyzed by a couple of different methods, whether just for reporting or otherwise.
Abrigo Executive Risk Management Consultant, Tim McPeak agreed that these results should change in the coming months, with the “unsure” answers becoming less common.
To learn more about preparing for CECL, listen to the on-demand replay of the webinar, CECL for Community Banks: The Practical Path.
On-demand Webinar: CECL for Community Banks: The Practical Path
On-demand Webinar: CECL Methodology Webinar Series