Preparing for upcoming regulatory changes in the ALLL
Jan 23, 2015
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. Several statements, including statements from the chairman of the FASB, alluded to a release date of Q3 or Q4 in 2014; however, due to issues brought up through further vetting, the FASB has decided to defer release of the new guidance to Q1 of 2016.
Todd Sprang, principal at CliftonLarsonAllen and member of the AICPA Depository Institutions Expert Panel, weighs in on the current status of the FASB’s CECL model in a September 2014 interview with Abrigo.
When asked about the current status of CECL, Sprang mentions, “We’ve got a lot better visibility as to what the model’s going to look like, and so now it’s down to some of the finer points.” He elaborates, “There’s a big difference in a standard if it says something’s required – if you shall do it or if you may do it. Those kinds of wording tweaks may be minor in terms of language of the document itself, but significant in terms of how you apply that standard.”
Abrigo inquired how the new CECL model will impact community banks, and Sprang cites a few examples of challenges the CECL model could cause:
- Community banks must be aware of where they are on the economic cycle
- Accounting for the life of the loan
- Tracking loans by vintage
How should community banks prepare for the transition? Sprang’s response suggests:
- Examine what types of models you are going to use
- Examine the data points you need for those models
- Once you know the model you’ll be using and the data required for that model, look at your current system and determine if you can get those data points out of your system. If you cannot, he recommends making system changes now in order to gather the necessary data prior to implementation.
- Capital plan for the adjustment
The interview also discussed data requirements of various models (peer analysis, historical loss, migration analysis, PD/LGD) and if any of the models require institutions to gather data points similar to those that will be needed under the new CECL model. Sprang responds, “When we talk to institutions who seem to be ahead of the curve, that seems to be more toward migration analysis and gathering data on pools…institutions could look to migration analysis as a type of proxy to what they may be doing under CECL.” Sprang also confirms that, for banks looking to prepare for CECL, one method could be to transition to migration analysis because it not only provides a robust calculation, it also helps prepare by securing the right data components for the new model.
Sprang also discusses the benefits of automated solutions and how they may help institutions with the transition to an expected loss model.
- Community banks lack robust staff so they may not have all the necessary resources to keep proper control over the process
- Reduction of mathematical errors
- Spreadsheet protection
- System access controls
- Taking the focus away from the manual calculation and instead focusing more on the results and high-level analytics
To learn more about how banks can prepare for the CECL model, access our whitepaper, A Practical CECL Action Plan.