What Your Bank Board Should Know About CECL
**Please check our most recent blog post regarding the latest changes to the FASB deadlines.**
The new accounting standard for determining bank allowances, Current Expected Credit Losses, or CECL, could have greater impact on capital and profitability than any regulatory action since Dodd-Frank. Because it includes planning for future as well as historical loan losses, CECL is likely to increase the bank’s allowance, 30 to 50 percent on average according to most predictions. But the allowance isn’t the only area where CECL will have a substantial impact. CECL will require more sophisticated methodologies, ways to accumulate and analyze more data, more external intelligence and expertise, additional disclosures and documentation, and because it requires the bank to anticipate losses based to a significant extent on past experience, it might even change the bank’s loan strategy and the makeup of the bank’s loan portfolio. It took the Financial Accounting Standards Board nearly five years to sift through all the details and prepare the new CECL standard. And everyone involved agrees that it will take banks almost as long to get ready to implement it. Depending on whether your bank is a public or private entity, you have three to four years to understand and prepare for CECL’s impact. And because the impact will be enterprise wide, everyone needs to be involved in the planning, starting at the top.
Next week, we will release the CECL Transition Calculator, a timeline and calculator tool to help you plan your CECL preparation process, to ensure you are ready with a CECL-compliant allowance methodology by implementation date. The timeline involves several steps, including:
- Automating the ALLL process: review, vet, purchase, implement.
- Testing and determining a CECL model
- Developing reports to facilitate governance and oversight
- Documenting processes and controls
- Assessing and addressing Internal Controls over Financial Reporting (ICFR)
- Capital and P&L planning
- Securing audit and regulatory approval
Does your Board understand the urgency with which they need to begin preparing for CECL? Will your Board wait and see about CECL’s impact or do they prefer to control how it will influence the bottom line?
For the most up-to-date information regarding CECL and the impending deadlines check out our most recent blog posts.