While seeking to adapt in an ever-changing regulatory environment, bankers must adhere to heightened data requirements, new calculation procedures, and auditor/examiner scrutiny. Specifically, financial institutions have to complete numerous steps when calculating their allowance for loan and lease losses (ALLL). This can often be time-consuming, especially when multiple individuals are involved in calculating the allowance, and as the calculation extends to a life-of-loan model, the calculation will become increasingly inter-departmental.
This requires banks to pay attention to obstacles that hinder risk management objectives. In the highly regulated environment where documentation and data-driven assumptions are key, a very real obstacle can be inefficiency, particularly while building out current expected credit loss (CECL) models. With an ALLL workflow management system, the institution can identify and resolve points of inefficiency, helping to achieve compliance.
Benefits of an ALLL workflow system
Workflow management systems can be described as technology or software that allow an institution to define, execute, manage, and modify processes related to specific strategic business objectives. They eliminate redundant tasks and ensure that tasks are completed in the outlined order.
A workflow management system that covers the ALLL under incurred-loss models would provide access to real-time, comprehensive information on the status of impaired and pooled loans in the portfolio, documentation of tasks assigned to each individual, a place for time-stamped notes, and the impact of stress scenarios on loans.
From a cross-functional standpoint, the benefits of an ALLL workflow system include:
- An integrated way to get portfolio risk data from the credit administration team, including:
- Quick access to risk ratings
- The classification of loans for individual or pooled analyses
- Which methodologies are used
- The amount (if any) needed to reserve, etc.
- Having the most recent list of loans to review for potential impairment
- A streamlined process to review current impaired loans to incorporate newly rated TDRs
- Updated charge-offs and recoveries that pull through since the last calculation date
- More transparent comparisons with the general ledger for overall accuracy
Having better information when preparing the allowance has numerous advantages when it comes to accuracy, speed and ease of preparation.
Applications for workflow: Managing the CECL process
For many financial institutions, the process of preparing for CECL can take several months or even years. It involves numerous bank employees, including financial employees, analysts, credit committee members, accounting representatives and examiners/auditors. As the allowance is calculated, bottlenecks are common, as a result of:
- Disorganized or nonexistent CECL committees
- Data mismanagement
- No revisitation of loan pool segmentation strategies
- Uncertainty regarding which methodologies to use
- The vagueness of qualitative adjustments and economic forecasting
- Not enough documentation to support decisions
Without a systematic and comprehensive way of defining and tracking the process, bank management is forced to rely on anecdotal information as to the status of the allowance process – a process that’s repeated at least quarterly and sometimes monthly.
But visibility into the process enables management to both (1) see the status of workflow tasks and (2) have an audit trail to keep track of what has been completed and by whom, leading to improved portfolio management and better forecasting.
Robert Ashbaugh, a former banker with PNC Bank and current Abrigo Executive Risk Management Consultant, notes: “It is very difficult to manage your portfolio risk when you are manually tracking it. Managers are seeking status updates on a weekly basis not only for their supervisor but also for auditors and examiners. There is no central source available to locate this information.”
If you remove management’s responsibility of allocating and monitoring the progress of day-to-day activities, the management team can allocate more time to strategic decisions that similarly support the institution’s growth or profitability objectives.
While an ALLL “workflow” can be tailored to suit any process within a bank or credit union, particular applications of a workflow management solution within the financial department can yield efficiency gains, higher employee productivity, visibility into the process, documentation ready for examiners, and a consistent adherence to the institution’s best practices. Specifically, ALLL workflows can help the bank or credit union overcome challenges with CECL project management, allowance audits, tracking documents associated with the calculation and identifying or transitioning loans to an impaired status.
Furthermore, with the rise of industry-specific solutions, a bank or credit union may choose to adopt a workflow management solution with pre-built templates, offering insight into how peer institutions establish stages and assign responsibility during the CECL calculation process. Regardless of which solution an institution implements, ALLL workflow management systems tend to unify employees with diverse skills into a more cohesive unit while building in a layer of accountability and awareness. Armed with that information and an efficient and transparent system, the bank or credit union will be better positioned to meet risk mitigation objectives.