No Vendor Required for CECL
The Financial Accounting Standards Board (FASB) did not mandate that you use a third party vendor to ensure you comply with the Current Expected Credit Loss (CECL) accounting standard for estimating your allowance. Regulatory agencies agree: vendors are not a requirement. For any of the governing bodies to have suggested you have to hire outside help would have been highly improper, likely an ethical violation if not a legal transgression. The implication that financial institutions are required by CECL to engage a technology partner, consultant or other third party support is either misstatement or misunderstanding.
On the other hand, neither FASB nor the regulators prohibit nor deny the value of bringing in outside support.
An institution can use software, such as Excel, and comply with the new standard. According to a study by RSM US, an auditing firm, about three-fourths of lenders were still using Excel in 2015 to estimate their allowances, though that figure was down 11 percent from the same study in 2014. But as banks and credit unions study expected loss and test prospective approaches to CECL compliance, they are encountering issues with data, resources, expertise and other concerns that are likely to lead them to look beyond Excel for help.
The technology and solutions MST has developed for the allowance process do not enjoy the luxury of being termed “required.” We have to prove our software fills a need and solves a problem, often many problems. Because financial institutions have a choice, which includes maintaining the status quo, our tools must prove superior to their current processes and practices. We must also demonstrate a significant return on investment. Otherwise, we would not have much of a future (a “reasonable” as well as “supportable” forecast).
Intentional or not, expected credit loss and its requirements create new demands on financial institutions, including for more and better quality loan level data. There are many issues, and more surfacing as institutions plot and pursue their transition course. Many will benefit from subject matter expertise and technological assistance in their transition to CECL. We have witnessed it, and now under a new business division, MST Advisory, are providing advice and direction.
Financial institutions have no other option over the next three to four years but to decide how best to determine their reserves based on expected loss. They do have the option of forging through the CECL abyss alone. But as there is no requirement to blaze a solitary trail, engaging a knowledgeable partner for the trip could be a best first decision.
