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Woulda, Coulda, Shoulda . . . and CECL

August 12, 2016
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Guest blog by Michael Gullette,Vice President, Accounting and Financial Management, American Bankers Association

“Woulda, coulda, shoulda.” are words often heard in sports, especially by those on the losing side.  “If the Seahawks had just run the ball on that last Super Bowl play. . . ” There’s always rationalization when it comes to failure.

Unfortunately, those words also apply to most accounting system implementations.

As a former life insurance company controller who led a conversion of GAAP accounting that included long-term forecasts of the future (sound familiar?), I am still haunted by woulda, coulda, shoulda. Our new accounting created havoc across the company as we endured quarters of wild earnings volatility and my discussions (would “analysis” fit here?) of results sometimes conflicted with those offered by business area executives.  Not good!

This could easily happen to bankers during their CECL implementations.

Complex or not, there is little debate that CECL will drive the allowance for loan and lease losses (ALLL) higher earlier. The required forecasting of the future will likely cause more volatility in the ALLL. And by disconnecting loss provisioning from current loan performance, CECL will require different and more detailed credit loss analysis. Remember that an increase in delinquencies and nonaccrual loans no longer will be related to an increase in credit loss provisions.

With all this in mind, it’s easy to see how CECL could radically change how many banks do business, and when it hits incentive compensation, all eyes in the C-Suite will surely be interested.

So, what are the wouldas, couldas and shouldas?  Complying with the new accounting got me a clean audit opinion on that first balance sheet. It was managing the process thereafter that was the problem. As it relates to CECL, you won’t want to look back and wish you woulda focused on how to:

  • Limit the size of the ALLL. This coulda allowed you to link your results to your business decisions. It also coulda allowed you to decrease your credit loss provisions and grow faster.
  • Control the volatility of the ALLL. This coulda allowed you to better understand how changes in your economic assumptions would affect your loss provisions. Then you coulda maximized your investable capital.
  • Communicate credit risk  performance. This coulda allowed you to structure management review procedures that are actually effective, making it easier to get through Board meetings, audits, and even to raise capital.

In other words, I wish I woulda started off by thinking through strategic goals of the company in light of the new accounting. Then I coulda better determined the data, metrics, and internal controls that woulda supported those goals. Initial implementation of CECL can be very simple and straightforward for many. The CECL processes thereafter, however, with quarterly changes in current credit performance mixing with changing expectations of future credit performance, introduce challenges that bankers have not previously faced. Unless bankers prepare now to face those quarterly challenges, there could be a lot of wouldas, couldas and shouldas, and, if things develop like they did for me, it won’t be pretty.

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