Start Preparing Today for CECL

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It’s not as hard as you think

By Moody’s Analytics

Recently, the Financial Accounting Standards Board (FASB) issued the current expected credit loss (CECL) standard. Although CECL doesn’t take effect until 2021 for most community banks, there are some basic steps you can take right now to prepare for it.

Get Familiar with the New Standard. The CECL standard is available to read on the FASB website (Topic 326). It calls for a more holistic view of expected credit losses, but does not prescribe specific methodologies for creating that view. Essentially, banks will need to incorporate what is happening in the current and near-term credit environment with their historical loss experience. To get up to speed, talk with colleagues, seek out education, consult with experts like regulators and solution providers.

Establish an Internal Working Group. Changing the way you calculate credit losses will affect many parts of your organization. The stakeholders will vary, but consider including board members, finance and treasury, credit, risk, loan review, and IT staff. Each group will bring different perspectives to the discussion. Get everyone on board by expressing the importance of the change, be open to their expertise, and then work with them to set timelines.

Identify Gaps. The FASB has not prescribed specific methodologies for developing an estimate of expected credit losses. If you’re currently using discounted cash flows, loss rate, probability of default, or provision matrix models when developing estimates, you may be able to leverage them. But CECL will also require a projection of credit risk over the life of the loan, including risk drivers that are relevant to your market and portfolio. Do you have the necessary data for this wider look?

Make a Plan to Bridge the Gap. Consult your resources again. See whether other institutions in your region are facing the same gaps and ask how they’re addressing them. Look to auditors, regulators, and trade groups. More information is available from the FFIEC, Federal Reserve, and “give-to-get” consortiums. It might also be time to bring in outside consultants and vendors.

A Change for the Better

In the end, CECL will generate more accurate risk data, which management can use for better decision-making. Analyzing and adjusting your current processes requires some work, but you’ll have an improved system as a result. To learn more about CECL, download the full eBook Preparing for CECL: How Community Banks Can Prepare for Implementation.

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