4 Reasons your financial institution’s data may be inadequate for CECL
Sep 11, 2015
That is likely one of the biggest questions financial institutions will face once FASB finalizes its guidance for transitioning from an incurred credit loss model to an expected credit loss model.
The current expected credit loss model, known as CECL, could mean gathering and computing up to 1,000 times more data, based on comparisons of what data is needed now for calculating the allowance for loan and lease losses vs. what data is anticipated to be essential under the new model.
And while many financial institutions may believe they’re already collecting sufficient data to smooth the transition, industry experts warn that some data practices may fall short of what will be needed. The actual specific data needs won’t be known until the CECL proposal is finalized, but in general, more data will be better, and loan-level data over time is key, according to Tim McPeak, senior risk management consultant at Sageworks.
Financial institutions will have some time before having to implement CECL, but the time to review data collection practices and plans is now if financial institutions expect to prepare for changes that will be needed in the transition. One informal survey conducted by Sageworks and Crowe Horwath during a webinar for bankers on developing a roadmap for CECL found that most respondents felt their data sources were meeting their current needs but they were not meeting anticipated needs under CECL.
Here are four ways that the data currently tracked by bank and credit unions may be inadequate when it comes to being prepared for CECL.
It’s incomplete. Calculating the ALLL under CECL will potentially mean estimating expected losses for the life of the loan, which implies that financial institutions will be able to review historical data on losses for many types of their loans over many periods. For an institution now aggregating charge-offs and recoveries quarterly, this loan-level focus will mean a substantial increase in the loss data required. Other new data needed will include risk ratings by individual loan, individual loan balances and individual loan segmentation. While some community banks lack the systems and data processing staff that bigger banks may currently use to capture this historical data, experts recommend that they take steps now to gather it, even if it means hiring accounting interns to comb through call reports and spreadsheets.
It’s not easily available. Even now, gathering data needed to calculate the ALLL is one of the biggest challenges for financial institutions. Many institutions must gather data from disconnected sources or spreadsheets, and doing so can be labor-intensive and time consuming without an automated system. Under CECL, banks and credit unions will need access to a lot of historical information – all at the loan level. Financial institutions storing such information in PDF form or across bank systems can be caught by surprise if they don’t get that data into a usable, accessible format. For example, using a financial institution’s core system to capture and store loan-level detail is limited by the fact that most core systems go back up to only about 13 months.
It’s unreliable. Accurate data is the central building block of a defensible ALLL calculation, so accurate historical loan-level detail will help prevent future subjectivity. However, policies by which data is gathered can vary from person to person, department to department, and institution to institution. Without a roadmap to identifying and gathering data, how confident can the bank or credit union be that it is accurate?
Governance and accountability is lacking. If separate departments develop their own roadmaps for identifying and gathering data, the institution can end up with a mish-mash of information that can mean different things to different people. Even subtle differences, such as how loan segmentations are labeled or how figures may be truncated, could cause significant hurdles when it comes time to accurately use the data. It’s important to have clear lines of oversight for defining data fields and gathering that data.
Asking your financial institution whether your data sources are complete, available, reliable and properly governed can help identify areas of focus as the bank or credit union prepares for life under the CECL model.
For more information about preparing for CECL, download the free whitepaper, “FASB’s CECL: How to Prepare Now.”