Final CECL guidance is near; what should banks do now?
May 27, 2016
Financial institutions are closer to getting their first look at the Financial Accounting Standards Board’s (FASB) final guidance on the new current expected credit loss (CECL) model. The long-awaited release, expected in June, will mark a major step in the multi-year development of the updated approach to the allowance for loan and lease losses (ALLL).
And while the clock will start counting down to implementation once the final guidance is issued, that deadline remains years away for many banks and credit unions. In directing FASB staff to move forward with drafting the final standard, the board in a 5-2 vote on April 27 agreed to push back the effective dates by a year. SEC filers must begin using the standard for fiscal year and interim periods that begin after Dec. 15, 2019. It is effective for other banks and credit unions for fiscal years starting after Dec. 15, 2020, and for interim periods a year later. Early adoption is permitted for everyone after Dec. 15, 2018.
As Sageworks Chairman Brian Hamilton has noted, the timeline for implementation means that banks and credit unions shouldn’t panic or rush to make wholesale changes to their existing methodologies, even though the allowance for loan and lease losses is one of the most significant estimates on a bank’s financial statements.
“What financial institutions can do now is take measured steps to examine their current calculation processes and to communicate with their boards so that institutional panic doesn’t snowball,” Hamilton said recently in a column for Forbes.com.
Adds Sageworks Executive Risk Management Consultant Tim McPeak, “It’ll be nice to have the accounting guidance finalized, but there will still be a lot of questions after it comes out.”
McPeak and other industry experts say institutions should use the coming weeks and months to learn more about recent tweaks to the guidance. For example, at the April 27 meeting, the FASB agreed that while SEC filers will still have to begin making disclosures about the credit quality of assets by year of origination, or vintage, it will allow a phased-in approach to the vintage disclosures for other public entities that are not required to file with the SEC.
“I suspect there are probably a lot of community banks that will still be subject to the full-blown approach as opposed to the phase-in, but the FASB does seem to be trying to accommodate some of the concerns in the market,” McPeak said.
The FASB has said it will continue conducting outreach activities and will work with its Transition Resource Group, a specially appointed group of bankers, auditors and other stakeholders assisting in understanding and clarifying the new standard after it is finalized. Banking regulators are also expected to provide guidance on how institutions implement the standard, McPeak said. In addition, Sageworks and CliftonLarsonAllen on June 7 will conclude their CECL Workshop Series of webinars that are providing the latest information on CECL, key insights and examples to help institutions prepare for compliance.
The bottom line for most institutions is that it’s unlikely they’ll have a handle quickly on exactly how their current processes will change, McPeak said. However, they can take steps to position themselves so they not only are ready for implementation once it is required, but also so they gain a competitive advantage and greater profitability through this significant shift from an incurred-loss model, he added.
“Understanding and documenting what is driving your institution’s credit risk today will be important when forecasting expected credit losses under CECL, not to mention that these actions minimize risk in the loans you’re underwriting today,” McPeak said.
“It’s also a good idea for banks and credit unions to start thinking about how they will do this [implement CECL],” McPeak said. “Maybe you want to get some cross-functional people from the credit and finance areas to begin meeting periodically to review the information available on the CECL model and to start working together.”
And while some FASB members are playing down the idea that new data requirements will pose a burden on financial institutions, it’s clear that many banks and credit unions don’t now have loan-level data that is accessible, able to be queried or comparable to prior periods. “I talk to a lot of banks that say, ‘Oh, we have a lot of good data on loans,’ and when I ask where it is, they’ll say they have a computer file full PDF snapshots, which can’t be queried or filtered.”
“I don’t hear anybody arguing that you won’t need more data under CECL than you have today,” McPeak said. “The issues in model risk management are very real, and they’re not going to be better under CECL.”
CECL provides an opportunity to fine-tune institutions’ risk management and credit lifecycle processes, given its major organizational and operational implications. Institutions that proactively consider these issues stand to set themselves apart from peers.
Related Asset - Whitepaper:
CECL Implementation Prep Guide
CECL Implementation Prep Guide - Download the PDF
Related Asset - Blog
FASB Moves toward CECL finalization
Excerpt Pulled From Blog:
"On April 27th, FASB continued with deliberations on CECL. This meeting came with marked progress by the board and signaled to the industry a commitment to release the finalized CECL model in June. The meeting included a review of costs and benefits, a change in effective dates and an update to vintage disclosure requirements."