Not Doomsday, but significant changes coming
**Please check our most recent blog post regarding the latest changes to the FASB deadlines.**
Perhaps you’ve seen the television series “Doomsday Preppers” on the National Geographic Channel. The docu-series follows otherwise ordinary families who are preparing for the end of the world (as they believe it will happen). It’s a fascinating look at a common idea that many of us face every day – preparation. Be it readying the essentials before a snowstorm or a major milestone like awaiting the arrival of a new baby – preparation is key.
Now, it’s not Doomsday by any means, but the banking industry is currently preparing for a significant milestone as well – the announcement of new accounting standards by the Financial Accounting Standards Board (FASB), known as the CECL model. It’s a hot topic in the banking community, as the proposed model is expected to dramatically change the current process for calculating an institution’s ALLL reserve. While the proposal for these changes has been on the horizon for some time, the recent international Accounting Standards Board (IASB) announcement issuing the IFRS 9 has left many wondering when the CECL model will be finalized, and in what form. The CECL model for US banks is expected to be released before the close of 2014.
Given the changes ahead, Sageworks worked with SourceMedia Research to survey executives in credit risk management at U.S. banks and credit unions about their preparedness, and the findings were interesting. In fact, the majority of banks are not currently prepared to meet the requirements of the proposed accounting standards changes.
Why might that be the case? The Sageworks survey uncovered three primary factors that shed some light on this conclusion…
The first is the prevalence of manual processes in calculating a bank’s ALLL. Nearly two-thirds of those surveyed – 67 percent — use spreadsheets as their current method of calculation. While this may suffice for many financial institutions now, legacy spreadsheets will not likely be robust enough to handle the complexity of the new model and the influx of data that will likely be required.
Secondly, a significant share – a staggering 37 percent – of credit risk managers indicated little to no familiarity with the model expected to be released by the FASB. Thus, more than one-third are underprepared because they have not assessed the changes that would be required or how they will impact their current method of calculating the ALLL.
Finally, many banks are simply holding off on making substantial changes to their current ALLL calculation processes. Among respondents familiar with the expected accounting-standard changes, more than one-third – 34 percent – noted their institutions would wait until the CECL model is finalized before moving to an automated process, one option for navigating the changes.
More than one-fifth (21 percent) of executives indicated they will make the appropriate upgrades prior to when the CECL model is actually enforced, which, if following a similar timeline to the IASB changes, would likely be 2018. Only 12 percent already have software that would help banks comply with the new model’s proposed requirements.
While many of the survey’s findings were surprising in light of the noise that has been made around the FASB’s CECL model, one thing is certain – changes are on the horizon. Is your bank prepared?
About the Survey
SourceMedia Research conducted the online survey during the months of June and July 2014, collecting responses from 236 banking and credit union executives with a role in credit risk management. The poll’s respondents were all involved in calculating the ALLL reserve or were decision makers for credit risk management software. The sample was drawn from American Banker subscribers.