Accounting Today | The Data Dilemma: Do Financial Institutions Have Enough Data for CECL?
Accounting Today
By Mary Ellen Biery, Abrigo
June 19, 2019
Data has always been the cornerstone of an accurate and compliant allowance for loan and lease losses (ALLL), and it will remain critical under the current expected credit loss model, or CECL. The Q1 2020 implementation deadline is approaching quickly for SEC registrants, and other banks and credit unions are making their own CECL preparations, but are financial institutions making enough progress in their data collection efforts? How much data are financial institutions gathering for CECL, and will it be enough to support their calculations?
According to the 2019 Abrigo Lender Survey, nearly half of all financial institutions have collected and validated data as part of their CECL preparation efforts. However, only 43 percent of respondents expressed confidence that the data they have will be sufficient for CECL. Nearly one in every six institutions in the survey, including some SEC registrants, reported being unsure if they would have sufficient quantity and quality of data to estimate losses under the CECL standard.
“Whether a financial institution has enough or the right kind of data for estimating the allowance for credit losses under CECL will really be determined on an institution-specific basis,” said Paula King, Abrigo senior advisor and a former bank CFO and co-founder. “Our survey, however, found that many banks and credit unions have made good progress compared to institutions surveyed in previous years. By the same token, some still have work to do.”
While less than half of lenders were confident they have sufficient data this year, the share has improved from 2018 (32 percent) and 2017 (19 percent), so institutions are clearly making progress on gathering data for their estimations.
Unlike the incurred loss method for estimating the ALLL, the CECL standard includes a longer loss horizon, forward-looking requirements, and, depending on which methodology or methodologies a financial institution chooses for its portfolio, the need for access to loan-level data. For many institutions, this means capturing and archiving loan-level data to ensure they have the flexibility to try different methodologies in their tests and as they plan their potential capital adjustments.
King has noted that gathering the required historical data has posed challenges for many financial institutions. Core conversions, incomplete data fields, missing data fields, and a lack of historical losses in a loan segment or in an institution’s portfolio can cause problems with running a particular CECL model or being able to produce a meaningful result with a particular CECL methodology. In fact, some institutions have explored using the weighted average remaining life methodology, known as WARM or remaining life, in part, because it allows an institution to provide estimates for losses on segments with data limitations.
. . .
To read the full article featuring Abrigo, visit Accounting Today, “The Data Dilemma: Do Financial Institutions Have Enough Data for CECL?”