FASB's CECL Model
The Financial Accounting Standards Board (FASB) issued the final current expected credit loss (CECL) standard on June 16, 2016. After the financial crisis in 2007-2008, the FASB decided to revisit how banks estimate losses in the allowance for loan and lease losses (ALLL) calculation. Currently, the impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the new CECL model.
Under the new current expected credit loss model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.
Key CECL finalization links and resources:
Credit unions vs. community banks: What are the different CECL challenges?
Community banks and credit unions face different challenges when preparing for the new current expected credit loss model (CECL). Often, credit unions are grouped together with community banks, although their experience will look different when building out their models. What loss rate methodologies are applicable to community banks but not credit unions? What challenges do credit unions face that are unique to their own loss history, portfolio structure and loan count?
Preparing for CECL questions during upcoming bank exams
Bankers preparing for the Financial Accounting Standards Board’s (FASB) new current expected credit loss model, or CECL, have many questions about implementation, including what to expect in the way of CECL scrutiny during 2018 visits from banking examiners. They got a glimpse of an answer this week when federal banking agencies discussed the topic during a webinar for community bankers about the new credit loss accounting standard.
The two main hidden complexities of CECL
CECL's details have been out for two years, but banks and credit unions may encounter complexities when theory collides with the reality of implementation.
New stress testing reform may have some CECL benefits
Banks with assets between $10 billion and $250 billion will no longer be subject to mandated annual stress testing, whether it be for the Dodd-Frank Act Stress Test (DFAST) or the Comprehensive Capital Analysis and Review (CCAR), due to the passage of a new regulatory relief bill.
Discover these CECL training resources for banks and credit unions
With implementation of the current expected credit loss model, or CECL, quickly approaching, banks and credit unions can benefit from resources and CECL training to help make the transition in their allowance for loan and lease loss calculations.
5 Benefits of leaving behind an Excel-based ALLL model ahead of CECL: One bank’s story
Each institution must consider its own size and complexity in determining the most appropriate approach to CECL. However, one community bank that decided to shift from an Excel-based model to an automated approach ahead of CECL has identified several benefits from its decision.
CECL within DFAST: What you should know
An upcoming whitepaper and webinar by Garver Moore, Managing Director of Sageworks Advisory Services, will explore differences between the CECL and DFAST exercises; this blog post excerpts a discussion on CECL within DFAST. The discussion thoroughly addresses stress testing projections, adoption dates, and CECL modeling.
CECL segmentation of the loan portfolio
The transition to the current expected credit loss model, or CECL, provides an opportunity to revisit loan portfolio segmentation. In the end, whether financial institutions make wholesale changes or instead determine that their current segmentation is optimal for CECL, institutions will need to document how they arrived at their decisions. Here are some tips for CECL segmentation.
Poll: How 254 financial institutions are approaching Q factors under CECL
During a recent webinar, Sageworks Senior Consultant Tim McPeak and Danny Sharman, an implementation consultant, shared tips to help institutions get prepared for the CECL transition. During the presentation, they also discussed current practices regarding the use of qualitative factors, or Q factors, in the allowance and how to prepare for using Q factors under CECL. A poll of 254 webinar attendees showed that Q factors are a common area of questioning by auditors and examiners.
CECL for community banks: A recap of regulators’ webinar
The FDIC and the Federal Reserve Board (FRB), in conjunction with the Financial Accounting Standards Board (FASB), the U.S. Securities and Exchange Commission (SEC), and the Conference of State Bank Supervisors (CSBS), recently hosted a webinar to discuss how smaller, less complex financial institutions can implement CECL. The purpose of the webinar was to help small financial institutions go from theory to application as they prepare for CECL and to dispel myths often associated with FASB’s new standard.
CECL Transition Workshops to Kick Off in March
As part of a three-pronged approach to help Sageworks’ clients transition to the excepted loss accounting standard, Sageworks will kick off in March 2018 a series of CECL Transition Workshops to take place across the country. These events will be open to all financial institutions, not just those who subscribe to the company’s ALLL solution.
Upcoming Webinar: How a Real Bank is Tackling CECL
On January 30, 2018, Sageworks will host a webinar that answers the question many financial institution leaders are asking: what should a real-life bank with real-life data be doing for the current expected credit loss (CECL) model?
Your credit union CECL committee
If a credit union has not yet formed a committee to oversee CECL implementation, consider including representatives from the board of directors, accounting/finance, information technology, credit analysis, internal audit and risk mitigation.
What credit unions need to know about CECL
Over the course of the next several years, any number of aspects of the financial industry can change. Information security could become tighter to better protect a financial institution’s sensitive data, or restrictions could relax allowing more credit union members access to lines of credit for mortgages or auto loans. One critical change in the landscape, though, isn’t member-facing – transitioning from the incurred loss model to the expected credit loss model in a credit union’s allowance for loan and lease losses (ALLL).
Life of Loan Concept
The more forward-looking CECL model will require institutions to adopt a methodology that takes into account the lifetime of the loan. This will require institutions to gather significantly more data components in order to perform the calculation.
An Update on CECL
Final guidance on the Current Expected Credit Loss (CECL) model has been an anticipated event in the eyes of bankers and other financial professionals. Its release marks the end of the incurred loss model in accounting for expected losses and brings with it a slew of process changes in the way financial institutions collect data and perform their ALLL calculations.
CECL effective dates vary among financial institutions. This post shows a timeline for implementing CECL, including selecting methodologies and validating models, depending on the institution's effective date.
The FASB issued the final CECL standard on June 16, 2016.
Thomas Curry, Comptroller of the Currency, has been on the record stating that banks should expect a 30%-50% increase in their allowance levels upon implementation of the CECL model. This will be a one-time adjustment to capital, not a provision expense.
With the transition to the CECL model, institutions will likely need to rely on archived loan-level detail. This could include individual loan segmentation, individual charge-offs and recoveries, risk ratings by individual loan, loan balances and duration.