The Challenge: An Accounting Standard Change of Momentus Proportions
The allowance accounting standard change from an incurred loss model to a current expected credit loss model essentially involves changing from estimating based on losses already experienced to estimating based on losses throughout the life of loans, including what is reasonable and supportable to expect in the future. That’s a whole new ballgame.
Not only is CECL a game changer, but where do you start? If one does know where to begin, do they have the bandwidth to take on this sizable project?
The Solution: Abrigo Advisory Services to the Rescue
HomeStreet Bank and the Abrigo CECL advisory team worked together to develop a full CECL Blueprint. The blueprint started with a data gap analysis of the bank's current data including breadth and depth. During the engagement they also designed pooling structures for the loan portfolio, methodologies that made sense with their specific loans, and adjustment factors that matter to the bank.
The Result: A Full Plan for CECL Transition and Testing
With the completion of phase one of its CECL transition in sight, HomeStreet looks most immediately to its auditors’ confirmation of the validity of the work that has been done, then to phase two, including testing its CECL methodology with MST Shadow Loss Analysis, a function HomeStreet recently added to its MST Loan Loss Analyzer platform. Running parallel incurred loss and CECL estimations will reveal the difference in the allowance between the two methodologies they decided to test in the advisory engagement, allowing the bank to fully understand and adjust to the enterprise-wide impact of CECL, including on its capital requirements.