Takeaways from the July 30, 2018 Ask the Regulators Webinar
The July 30 installment of the “Ask the Regulators” series included speakers from the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the U.S. Securities and Exchange Commission (SEC), the Conference of State Bank Supervisors (CSBS), and the Financial Accounting Standards Board (FDIC). The goals of the session were to:
- Share the agencies’ perspectives on 27 questions submitted by community institutions
- Demonstrate a consistency of views across agencies
- Share common challenges faced by community institutions about implementing CECL
As part one in a series of blogs intended, in total, to summarize – and where appropriate, comment on – the agencies responses to each of the 27 questions asked by community banks. The following 5 questions have been identified as hot topic questions that we are being asked today:
Question 3: Supervisory Expectations.
How will the agencies evaluate the institution’s process to determine the allowance for credit losses (ACL) under CECL? Will examiners challenge institutions if their method results in a lower ACL under CECL than under the incurred loss model?
Financial institutions are questioning how their models will be viewed by their auditors and regulators. The regulators’ response centered on the need to provide support and documentation for your allowance estimate. Management will need to plan and evaluate the impact on regulatory capital. At this time, they noted, examiners are focused on information gathering relative to CECL preparation as opposed to evaluating CECL.
If your CECL allowance is lower than your incurred loss estimate, you will need to document why. If the allowance is unreasonably low, and the assumptions used to get to that total are not supportable, it will not be considered sufficient. There will be no benchmark for the allowance; the objective is not to drive a peer group median, but to have the appropriate allowance for your institution.
Question 4: Third-party vendors.
Do the agencies have a specific expectation regarding the use or purchase of third-party vendor services to implement CECL?
Many institutions are seeking help from third-party vendors to capture and maintain their loan data, acquire external data or run the methodology. The agencies’ response was the same as to “Question 16” in the December 2016 release Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses: “The agencies will not require institutions to engage third-party service providers to assist management in calculating allowances for credit losses under CECL.”
MST recommends that an institution determine its need for a third-party vender by asking itself the following three questions:
- Do we have sufficient in-house resources and expertise to handle the transition to CECL ourselves?
- If so, do our in-house resources have sufficient bandwidth to take on such a project?
- If so, is that the best use of their time?
If the answer to any of these questions is “no,” consider engaging third-party assistance.
Question 7: Historical Data.
What is the minimum number of years of historical data required to calculate the ACL?
The agencies responded that each institution will determine its look-back periods based on the composition of its portfolios and the lives of the loans in those portfolios. There is no minimum number of years of data required by the Guidance. The expected life of the loan, which is the contractual life of the loan adjusted for prepayments or expected TDRs, will need to be covered.
Question 12: Segmentation.
What is the appropriate level of loan pool segmentation? How granular should it be? Would it be acceptable for a community bank to pool loan segments based on FFIEC Call Report categories?
Management will need to use its judgment to determine the appropriate level of segmentation granularity. The pools should not be too granular to identify loss trends. Institutions with very low loss levels may need to pool at a less granular level so they can identify loss trends. Call reports may provide appropriate segmentation for some institutions. The more complex your portfolio or the more losses you have experienced, the more granular level you’ll likely need to identify loss behavior.
Question 27: Non-public business entity effective date.
Will there be a change in the effective date for non-public business entities?
For a full explanation of the FASB’s proposal to extend the CECL effective date for non-public business entities, read our blog FASB Proposes CECL Extension: What’s the True Impact?
Watch for more takeaways from the webinar in upcoming blogs.