Can a financial institution’s allowance be lower under CECL?
Will examiners challenge financial institutions if the current expected credit loss method (CECL) results in a lower allowance than under the incurred loss model? Banking agencies addressed this question during a recent webcast.
CFO Corner — “ALLL” about CECL
In this occasional feature, CFOs from financial institutions share their approaches to the ALLL and to the CECL transition, as well as advice for keeping the board informed about related matters. Here, Ronald S. Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer of The Washington Trust Company shares advice from his institution.
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 D’s of the ALLL: Data and documentation
One critical component of the ALLL is data-gathering and documentation. The reserve is more than simply a calculation of funds, and a lack of or insufficient data and/or documentation is often a sore spot for many banks and credit unions. Whether an institution assesses the ALLL monthly or quarterly, collecting portfolio-level and loan-level data is often the most time-consuming aspect of the process, but a crucial one.
Chatting About ALLL with your Regulators
It is no secret that the Allowance for Loan and Lease Losses, ALLL, is still of keen interest to regulators these days. And that is to be expected, based on the not-too-distant past.
Included in the 2006 Interagency Guidance was a statement that “Policies should require periodic validation of the methodology.” It is typically recommended that these model validations take place annually to ensure the methodology complies with Interagency Guidance/GAAP, and that it is appropriate for the portfolio.
Auditors vs. Examiners
The mixed interest comes into play when we consider that institutions can release reserves directly into income. Auditors of banks may wish to see high profitability to appease shareholders, whereas examiners may wish to see a more conservative view of the institution’s ALLL.
Presenting to Examiners
When presenting the ALLL results to examiners, it is imperative that financial professionals include the proper documentation. Any and all assumptions must be documented, and the examiner should be able to view the input of the methodology and how the financial institution arrived at its final number.