Start CECL implementation now so you get the right processes and people in place.
Moving to CECL isn’t like ramping up for the Paycheck Protection Program (PPP) or even handling pandemic-related loan workouts. In those unanticipated situations, financial institutions have had urgent deadlines for which they scrambled and shifted staff to meet the unexpected challenges. CECL has been in the works for more than a decade, and regulators have repeatedly urged bankers to prepare for what the American Bankers Association has called the biggest change to bank accounting ever. Starting now affords enough time to enhance policies, procedures, and systems. It also will allow more collaboration between credit risk and accounting staff needed to develop forecasts for credit risks and trends.
Graham Dyer, Partner in Grant Thornton LLP’s National Professional Standards Group, has noted that accounting staff creating the estimate for the allowance of credit losses (ACL) will need to utilize quite a bit more information from the credit risk side of the institution. For some banks or credit unions, a closer working relationship between the two sides can be a dramatic change and involve cultural issues that require preparation to navigate.
Start CECL adoption now so you can assess and address any data gaps and accuracy issues.
A critical first step to a successful CECL transition and to a conversion that satisfies examiners is assessing the financial institution’s data. Regulators have said that data quality is a critical component of the CECL estimate. Some financial institutions store loan data in different places – mortgages in one system, auto loans in another, etc., so assessing and gathering it can be time consuming.
Banks and credit unions also need to determine what data has been tested or historically reconciled to make sure that gaps and inconsistencies do not cause problems. If a community bank or credit union determines it lacks data (such as certain fields needed), has inaccurate data, or struggles with gaps in data, then time is of the essence to get on track to develop controls as the CECL process is being designed. It’s important to be set up to have data on a go-forward basis.
Banks or credit unions might also need to make assumptions based on peer or industry data in the near term, so beginning CECL adoption now provides sufficient time to determine those needs and identify appropriate resources.
Starting CECL efforts now gives you options and the ability to pivot.
The CECL standard is non-prescriptive. Accounting standards setters and regulators intend for banks and credit unions to choose the methodology that is right for their loan portfolio and unique credit risk situation.
Waiting until the last minute to begin CECL implementation will limit the flexibility available to select a methodology, while earlier implementation provides time to test and compare different methodologies. Many institutions have started with one methodology and later switched to another.
During the ThinkBIG Conference, Heather Raibourn, Senior Vice President of Credit Risk Analytics & Credit Policy at Homestreet Bank, said it makes sense to look at challenger models while choosing a CECL model during implementation. Doing so provides reference into some data sets that a financial institution might need to collect going forward, she added.
While conducting CECL testing, consider the impact each scenario will have on capital. Starting sooner also provides more time to give institution management comparisons of the current ALLL against proposed CECL scenarios and their impact on the provision and capital, so plans can be made.
Another factor that banks and credit unions should keep in mind is that internally developed models will need to be validated by an external authority, and internal controls must be developed. If internal development is not feasible, the CECL committee will need time to vet an external ALLL-CECL solution and the provider or consultant.
CECL vendor due diligence should ensure that the solution is transparent and can be easily communicated with examiners. Since comparing methodologies is part of determining the right one for CECL, it’s critical that any third-party solution is capable of running multiple scenarios concurrently.