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Setting the Foundation for the Seven Steps to CECL

Brandy Aycock
April 21, 2017
Read Time: 0 min

**Please check our most recent blog post regarding the latest changes to the FASB deadlines.**

 

To start building your dream home, you need to have a blueprint from an architect. But even with that in hand, before you erect the walls, you must lay a firm foundation.

The Seven-Step process published last year serves as a blueprint for lenders to manage the long and enterprise-wide transition to CECL (Current Expected Credit Loss), the new accounting standard.

The firm foundation from which to start getting CECL compliance right is captured in the Seven Steps 2.0.

Why the 2.0 Update?

The “Seven Steps to a CECL-Compliant Model” was published in spring 2016. The whitepaper was well received because it described concrete steps bankers can take to ensure they are prepared when the institution has to begin estimating the allowance based on the new accounting guidance.

After consulting with industry experts and banking professionals, it became obvious that the Seven Steps need preliminary activities—the formation of a steering committee and a gap analysis. Based on that insight, the guide has been enhanced to “Seven Steps 2.0: Setting Up and Seven Steps to CECL Compliance.”

The steps and 2.0 improvements

The upgraded whitepaper retains the original Seven Steps and explains why lenders need to create a steering committee and a gap analysis to inform the CECL transition. In case you missed them, the Seven Steps are:

1.     ALLL Automation

2.     CECL Modeling

3.     Developing Reports

4.     Documenting Processes

5.     Assessing Impact on ICFR (Internal Control over Financial Reporting)

6.     Capital Planning

7.     Audits and Regulatory Approval

There is also an online tool to help institutions determine where they are on the Seven Steps timeline.

Even with all these assets in place, financial institutions have a lot of decisions to make about adapting these steps to their specific circumstances. Every decision is a chance to get things right and streamline your path to CECL compliance—or get them wrong and become mired in an accounting nightmare of poor examinations and audits and missed profitability.

The steering committee and gap analysis can help financial institutions clarify what they need to do during each of the Seven Steps. Let’s look at each of them in a bit more detail:

Why your institution needs a CECL steering committee

The Seven Steps must dovetail with the distinct character of your bank or credit union: its leadership, staff, customer base, credit risks, technical acumen, and business culture. The CECL steering committee makes that happen.

The committee has to address the biggest questions:

• What processes and departments provide data to the allowance estimation process?

• How will the CECL transition affect the individual departments and divisions within your institution?

• What will it take to master the complex technical requirements of CECL?

• How will they deliver an effective gap analysis?

Then the CECL steering committee guides the institution through the Seven Steps or steps it deems necessary for successful implementation and compliance.

The crucial importance of a strong gap analysis

The gap analysis is a process of assessing prospective methodologies in light of the quantity, quality and types of data currently available to the institution. It even extends beyond data to workflow and policy.

An effective gap analysis accounts for your current allowance process in comparison to what the process, data, method, governance, workflow, etc. will be under CECL.

This raises a host of questions that lenders must answer, such as:

• Which data sets give the clearest picture of your future credit risks?

• How do data-forecasting needs change based on the different kinds of loans in your portfolio?

• What data is needed for the methodology or methodologies chosen by the institution?

• How does the CECL transition affect governance, risk management, credit modeling, financial controls, reporting, and technology systems?

To be effective, your steering committee must assign the right people to develop a sophisticated gap analysis that creates a firm foundation from which to move forward.

A towering transition starts with a strong design

“Seven Steps 2.0” dives deeper into the key issues your institution must address to develop a robust implementation plan.

The transition to CECL acknowledges that today’s lenders and financial professionals can combine vast troves of data with unprecedented computing power to develop advanced risk models. But all these possibilities still require people to decide which data to focus on and how best to deploy their technology assets.

And that brings us back to the idea of a blueprint. After all, even the greatest engineers wouldn’t think of building a skyscraper or dream home without one.

About the Author

Brandy Aycock

Brandy Aycock is Director of Event Marketing at Abrigo.

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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