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The CECL Delay is ‘A Gift of Time’ For Lenders

By Steve Picarillo

August 1, 2019

In a recent update, the Financial Accounting Standards Board (FASB) indicated its board voted unanimously to propose delaying the effective date of the new Current Expected Credit Loss (CECL) model for some institutions. Under the proposal, smaller publicly traded companies, credit unions, and private companies will now be required to implement CECL for the fiscal year and interim periods beginning after Dec. 15, 2022.

The proposal will undergo a 30-day public comment period in August 2019. If the comments are mostly favorable, the board will issue a final document on the decisions. While this news will give management at these firms a moment to take a collective breath, this pause should be brief. Lenders still need to assess the impact of the CECL regulation; update processes, models and systems; plan for the eventual transition; and fully test the new CECL models.

CECL readiness assessment

Given the scale of the CECL transition, Ankura has developed a CECL readiness assessment to evaluate the current state of an institution’s procedures and make recommendations on what is needed to achieve an effective and efficient transformation. Our team of experts will review the CECL transition process and governance framework to identify gaps and concerns, recommend actions needed to enhance controls, and reduce transition risk. Our consultation will flag potential delays or errors in the CECL transformation and validation process that may lead to costly and disruptive last-minute issues. Ankura’s readiness assessment is a complete evaluation and analysis of the institutional processes, data, credit-loss models, reporting and IT capabilities, and governance framework.

As part of the assessment, Ankura’s team works collaboratively to define key milestone dates, determine the appropriate modeling methodology for each portfolio product, develop a road map, prepare a practical transition plan, and provide guidance on the ultimate impact to the institution’s financials. Contact us to learn more about how we can help you in the CECL journey.

Data is the foundation of accurate modeling

Our assessment begins with an evaluation of your institution’s data — its completeness, accuracy, and robustness. Data preparation is a time-consuming and arduous task in the CECL transition, and appropriate and accurate data is a core component to precise credit-loss forecasting.

CECL modeling is data-intensive and requires significant data gathering and analysis. Unfortunately, many institutions quickly realize that they lack adequate and complete data to calculate an accurate estimation of credit losses. Early identification of data gaps and IT capabilities will help ensure a timely transition and more accurate modeling.

To build or buy the CECL model

Ankura will assess the applicability of the current models, which will likely lead to the discussion of whether the firm should invest in building custom models or select vendor-developed versions. There is no one right answer to the ‘buy or build’ question, as institutions have varying modeling capabilities, differing complexity of portfolios, and disparate expectations in relation to size, regulator, and even auditor. Given the importance of getting CECL right, each institution needs to consider the time, cost, and additional resources required to build an effective forecasting model.

Regardless of the decision to build or buy, models must be back-tested, sensitivity-tested, and validated to ensure accuracy, goodness of fit, and robustness under varying economic scenarios. Given that documentation and validation processes are both labor intensive and time-consuming, the impacted lenders should take advantage of the additional transition time to fully test their CECL models.

Governance is key to an effective CECL transformation

Ankura’s team can help build out a strong governance plan for CECL as well as a model risk management program. An effective governance framework includes an active CECL governance committee, the engagement of internal and external audit, the preparedness of the reporting function, and firmwide CECL coaching. Although CECL has been a topic of conversation for the past five years, many board members and executives only know CECL on the fringes. CECL should be second nature to those in charge, so they are able to explain the organizational impact clearly, concisely, and consistently to stakeholders.

Good governance and an effective plan include ample time to run the new models in parallel with the existing models. The transition deadline delay will benefit certain financial institutions, as we have seen many 2020 CECL implementation banks falling short on lengthy parallel runs due to delays in data preparation, model development, and model implementation. The shortened parallel runs limit a bank’s ability to properly compare the forecasted loss reserves using current methodology against the forecasts using CECL methodology. An extended parallel run period allows for increased confidence in the models and gives management a clearer view of the impact of CECL accounting standards prior to implementation.

The road ahead

The road to CECL compliance is long and arduous. Banks greatly benefit from an early start, a well-developed plan, and a guiding force. A full transition can take two to three years, when considering the following challenges:

  • Updating processes and procedures
  • Development, documentation, and validation of multiple models
  • Identification and remediation of data gaps
  • Analysis of parallel runs
  • Development of management and financial reporting

With so many milestones to achieve, lenders need to develop a plan that points them toward success. Lenders should look at the delay as a gift of time that will allow them to execute in an effective manner. CECL compliance is a journey, not a destination, as the transition plan will be continually tested and refined.

Ankura’s risk advisory solutions for financial services

Ankura’s seasoned professionals have hands-on experience in banking, modeling, enterprise risk management, capital planning, consulting, regulatory compliance, governance, and data analysis. Our team has the essential subject matter expertise to advise and execute on the most difficult risk and regulatory matters. With deep experience in the US and global banking sector, we tailor our solutions to our clients, recognizing one size or approach does not fit all. Click here to learn more.