Introduced by the Financial Accounting Standards Board (FASB) in June 2016, the Current Expected Credit Loss (CECL) model changes 40 years of standards related to accounting for credit risk changes. The impact will vary, but every financial institution is required to comply with the standards.
CECL Starts Now
The effective date for the updated CECL guidance begins in 2020 for SEC registrants. Even if your implementation deadline is a few years out, now is the time to consider your new credit loss estimation model. As with so many other regulatory issues, compliance is the lowest bar. The real benefit to CECL is the data-driven insight it will produce as you gather, store, model, and engage detailed information about your loan portfolio.
Implementing CECL requires a host of resources and the time to develop, test, troubleshoot, and confirm your methodologies. Deciding which resources you engage should be based on how your institution currently captures credit risk and calculates increased allowance for loan and lease losses (ALLL).
Many banks struggle with knowing what data to gather and understanding how it comes together to impact the financial statement. Begin by clarifying why the data matters. During the process of selecting the models and solutions necessary for CECL compliance, you will specify vital details like causes of loan risk, trends influencing lending requests, and exposure that exists beyond the numbers in a portfolio. The holistic insights the accumulated data will provide not only will position your bank to answer questions from regulators; but it will also enable your leadership and board to make more educated, confident lending decisions.
Although credit unions are less likely to see variability in the loan portfolio, CECL requires you to gather, store, and employ credit risk data within structured models. Implemented properly, the process and investment needed for compliance will offer you, your members, and your constituents useful insights into risks inherent in various loan sizes.
CECL requires you to gather, store, and employ credit risk data within structured models. Implemented properly, the investment and investment needed for compliance will produce vital protections and competitive advantages. In particular, establishing clear, careful data around borrowing for critical resources like agricultural supplies and poultry lending, protects the institution and enables proactive decision-making.
ROI of Resources, Models, and Metrics
CECL models and software solutions are costly and time-consuming. Maximizing your return on investment means doing more with the solutions than the minimum needed for compliance. The degree to which you reap measurable benefits will come from how well the selections improve your capacity to control pricing, perform credit analysis, and conduct strategic planning.
HORNE offers a consulting-led approach to implementing models and software, taking into account those critical variables to build an intelligent CECL roadmap. Working closely with you, we assess the data you have and need in your loan portfolio and help you to perform simulations.
Our phased implementation approach helps you to confirm critical resources, models, and metrics at every step. As part of the process, we will customize the models and software solution that creates the highest value for your portfolio and your institution. You may build on existing systems and methods for credit loss estimations. Even then, you will need to clarify your loan portfolio and credit quality indicators, select appropriate CECL model(s) for each loan pool, and evaluate your software and CECL models for sufficiency. Whether you’re looking for a new software solution to help you comply with these rules or you want to modify existing software to do the job, HORNE has the resources to get you up to speed with the new requirements quickly and efficiently.
CECL Represents Opportunity
Once solutions are in place, HORNE will continue to ensure your institution can respond to regulators’ questions with confidence. We also can help to ensure the customer, lending product, and credit quality data will continue to improve your ability to support the performance of your loan portfolio and mitigate risk.
How effectively you implement CECL will affect your financial statements and business decisions for years to come. Rely on HORNE to gain the resources and knowledge you need to manage these complex guidelines toward lasting value.
Take CECL from compliance challenge to opportunity. Wherever you are in the process, HORNE will take you forward.