Questions Directors Should Be Asking About CECL
The impact of CECL will be enterprise-wide. That includes your Board. And your presentations about CECL to your board will involve a unique set of explanations. What will be the effect on the institution’s financial statements? On capital? How much will all this cost? In this presentation from the 2016 National ALLL Conference, Robin Sawyer, a partner in Dixon Hughes Goodman’s Financial Institutions Services Group, helped attendees anticipate board concerns and questions. You can also watch Robin’s MST Talk here.
10 questions your bank or credit union board might ask:
Q 10. What is the plan and who is leading the charge?
The first thing to do is name a project manager and team. If you’re in charge of the model, is the leader you? You need a plan for transition. The process will be more
complex, and you will need auditor and regulator input.
Q9. Can we use our existing model or do we have to outsource?
We don’t see how you can do it in Excel. In moving from Excel to software, think about how to support that with your auditors. So your model will likely be different. PD/LGD is common among smaller institutions.
Q8. What will this cost us initially and ongoing?
In addition to upfront and ongoing costs, be mindful of hidden costs as we learned in relation to SOX. And if you’re a team of one, you better find some other team
Q7. Which loss methodologies will you use and why?
You need to understand the different types of models and what’s easiest to support. Will your chosen model or models be able to grow with you, not just comply with CECL but help you manage risk. Vintage is one type of data that will be needed.
Q6. What about data?
- Do we have the appropriate historical data?
- What do we need to start tracking now?
- Can our current system capture the data we need?
- Will new systems be needed?
- Review in connection with both the model decision and loss methodology decision.
Q5. How will credit and accounting interact using the new approach?
What is their view on key performance indicators, pooling loans, reasonable and supportable assumptions, average loan life?
Q4. What will our regulators be expecting in terms of detail, model choice, methodology, and bottom line results?
- Foreshadow your expected results
- Get buy-in from regulators and accountants
Q3. What is the expected impact on our financial statements and capital ratios, considering also:
- Basel III phase in requirements
- New leasing standard
- Anticipated growth and balance sheet changes
- Show us a picture: exactly what does day-one implementation look like?
Q2. Will we be outliers versus our peers upon adoption?
- What is everyone else our size doing?
- What are the largest banks saying about adoption?
- Compliance vs. accuracy: how do we know the new answer is accurate and meaningful?
Q1. Risk management: what should we be doing right now?
- Impact analysis on our organization
- Model risk governance – variations in small, mid-size, large banks and credit unions
- Enterprise risk management – it’s not just an accounting challenge
- Understanding the model/methodology
Larger institutions have a lot of infrastructure in place already. Smaller institutions have some catching up to do. If you break portfolios down to a granular level, and if you have good data, you might find your ALLL will be about what it is now. If your allowance doesn’t go up, regulators will be suspicious, unhappy.
Your committee and board: what is their concern? Risk management. Enterprise risk management. You have to document correct and supportable information to your
audit committee – you need a plan, a team, a peer group; and talk to vendors about costs.