IBS Journal November 2017
19
Financial institutions and other organizations will now use forward- looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted. Organizations will continue to use their best judgment to determine which loss estimation method is appropriate for their circumstances.
Moving forward with CECL
The aim of accounting standard setters is to devise a mechanism for banks to estimate the risk of loss. For regulators, the goal is to avert, or at least mitigate through diligent preparation, damage to the financial system and the banks that make it function. For regulators, accounting standards are a means to that end. CECL is the consummation of finance, risk and regulatory reporting by embedding aspects of all three within one standard.
occurs. Allowances for stable and riskier assets alike, from the moment they appear on the balance sheet, must reflect lifetime losses estimated to occur on defaults anticipated for as long as the assets are held on the books.
Furthermore, firms should devise their own assumptions and analytical methodologies in measuring expected credit losses, per FASB’s June 2016 guidance, “based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.”
TAKING BANKERS’ PULSE ON CECL How are banks viewing the new CECL standard? In a recent educational webinar for banks hosted by Wolters Kluwer, 44 percent of 135 respondents cited “Data Requirements” as the single biggest challenge they anticipate facing when implementing the new standard. Twenty-six percent viewed “Data Modeling” as the next biggest challenge, followed by “Complex, Ongoing Analysis as a Concern” (17%), and “Reporting and Governance” (12%).
Another polling question asked how much banks expected their loan loss provisions to increase, once CECL went into effect. Fifty-five percent of respondents anticipated their loan loss provisions to increase “between zero to 20 %,” while another 25 percent cited “between 20 and 40 percent” in loan loss provision increases.
Finally, when asked whether banks should receive a reduction in credit risk capital requirements, given the larger loan loss provisions they will hold under CECL, more than half (54 percent) voted “yes,” whereas 20 percent voted “no” and the remaining 26 percent held “no opinion” yet on this aspect of the standard.
Clearly, banks already are recognizing the potentially seismic impacts the CECL standard will have in their day-to-day operations.
Because CECL touches on the above three principal functions at an organization—finance, risk and regulatory reporting—it is essential that the enterprise providing the systems can offer the technology, as well as the brainpower of its human experts, to support all three. Expertise in one or even two is not good enough.
Once the right systems are in place, the dovetailing of management and regulatory objectives permits firms to leverage the systems to accommodate the need for greater cooperation and communication among functions, particularly risk and finance, and at all levels of management in all places. That means a single system with the flexibility to behave like many smaller ones, allowing data to be shared and manipulated for analysis, forecasting, budgeting and planning in ways that conform to the needs of each part of an organization.
Such a capability also serves the ultimate goal of creating a safer, more efficient institution, which is the whole point of the new regulatory and accounting frameworks, of course. This also means that companies might have already started the journey. One benefit of having so many intersecting challenges and objectives is that firms that have begun to configure their systems to conform to finance, risk and regulatory reporting practices have also begun, whether they realize it or not, to prepare for CECL.
The future is not now, but it is close
The introduction of new standards and the discrepancies between them present fresh dilemmas for senior bankers, especially because the standards call on them to make better guesses about something inherently unknowable and unquantifiable—the future. There are still many unknowns concerning the impact that CECL will have, especially because its final form may not yet be written.
What is certain is that, unless they are being unduly modest, firms are not ready for implementation and what lies beyond. Bankers must prepare for a future in which the main focus of analysis will be an even more distant future. The only catch is that they must complete their preparations before these deadlines arrive—which will be here sooner than many anticipate.
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