Are You Ready for CECL?
Published May 3, 2022
Most banks are in the process of implementing the adoption of the Current Expected Credit Losses (CECL) standard. While most banks have most likely created an implementation plan, there will be some who have not started the process. Here are few tips to make sure your implementation is a success.
Written plans provide the centralized documentation by which team members and stakeholders can measure performance. Bank management should regularly report details and the status of the CECL implementation to the Board of Directors. It is critical to keep in mind that a successful project should begin with a plan and include:
- A goal that is clear, comprehensive and achievable.
- Milestones to measure progress
- Clearly states responsibilities of those involved.
Written documentation is critical to success in any project. It provides a way to measure the success of a project and track who has participated and what they have done to move the project to the finish line. Your written documentation should note:
- What decisions are made (vendor, model, method, etc.)
- What personnel are involved
- What assumptions are used in the model
- What timelines are being used
To be clear, banks are not required to use a vendor. However, banks might benefit from using one to implement the new standards. The needs of each bank are different; additionally, each vendor is unique. There are CECL vendors who offer a full spectrum of costs and features to vendors who play a smaller role in the implementation.
When evaluating a vendor, consider the following:
- Does the vendor fully apply the CECL methodology?
- Is the CECL model all-encompassing? Smaller vendors may not provide end-to-end services:
- Specific reserves
- Pooled reserves
- Qualitative factors
All vendors provide modeling for the pooled reserves, but not all vendors provide resources for specific reserves and qualitative factors. For some vendors, the bank still needs to prepare worksheets and transfer the results into the model for specific reserves and/or qualitative factors.
In parallel runs, a bank typically runs both their current incurred loss method (“ILM”) and CECL method for four or more quarters. This provides an estimate of the impact of adoption, and an estimated adjustment to be made at adoption. A Bank should run parallel runs only after deciding on models and methods.
If you wait until June 30 and begin running parallel, you won’t have enough time to run four parallel quarters before adoption, right? Maybe. Maybe not.
Here’s a pro-tip: The most efficient way for you to run four quarters in rapid succession may be to go back in time. Use your custom report download for importing data into a model and go back three quarters.
Accounting and regulatory guidance is clear that qualitative factors are here to stay, but they may not look exactly like your ILM model. Some banks have fewer qualitative factors, and some have the same. All banks should still have some factors. Discuss your plans for qualitative factors with your auditor to make sure everyone is on the same page.
The vendor application is a model. If you are using worksheets to support the application, they are a part of the model. If you don’t have a vendor, but use spreadsheet(s) instead, it’s a model. Regulatory guidance is clear: strong model risk management includes an effective model validation process.
Validation is important prior to implementation. Talk to your auditor about the need for validation of what you have planned. If you determine you will need a validation, work on scheduling now. We strongly recommend that, based on your project plan, schedule a validation engagement this year, even if you are not currently ready (but plan to be ready). There are several thousand financial institutions implementing CECL this year, and capacity for validations is likely to shrink as the year goes on. Scheduling early will give you the best chance of the validation taking place at your preferred time.
What Should We Do?
Get Started NOW! Between the time you read this and when you must adopt the model, time will pass quickly and your to-do list will continue to grow. The adoption date will be here before you know it. If you would like to discuss your bank’s readiness, including validation plans, reach out to a trusted business advisor