Current Expected Credit Loss (CECL) Accounting Standard:

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Presentation transcript:

Current Expected Credit Loss (CECL) Accounting Standard: An Introduction for Bank CEOs and their Board aba.com |1-800-BANKERS

“Losses in the Portfolio” “Risk in the Portfolio” The Change to CECL FAS 5: “Losses in the Portfolio” CECL: “Risk in the Portfolio” Estimate of “Incurred loss” Estimate of “Expected loss”

CECL: Expected credit losses over life of loan or portfolio Life of Loan (LOL) loss expectation (pool basis) effectively recorded at origination Forecast of the future to LOL required Historic averages of “life of loan” losses Used as starting point for estimates Applied to periods beyond “forecastable future.”

So what does this mean for me? Credit losses will be recognized earlier in my financial statements My current process to estimate my allowance will need to change Periods of directional inconsistency between performance metrics and the provision

Where to start? Assess my current ALLL reserve process: Communication: How do I currently estimate the reserve (data, model, governance)? What additional information or modeling tools will I require to expand my estimate to estimate for life of loan? Communication: Can I get out in front and share your assessments and pitch your solutions to your auditors/regulators to get them on board? Can I involve other parts of the bank to ensure a consistent view between accounting, credit and others? Allocate resources: Do the right people have the time needed to assess and implement the necessary changes? Do I need external expertise or tools? Other considerations: How will this impact my capital and do I need to start planning now to adjust? Can I unlock value from the life of loan estimate to use in pricing or credit decisions?

Implementation considerations? Data to support life of loan loss, Q factor estimates Vintage information Further segmentation by credit risk characteristics Forecasting the future Governance: Documentation Internal controls

Biggest CECL Challenges 1. Investors/Mgmt – Communications Relationship of traditional metrics to provisions no longer continues New Metrics needed 2. Auditors – Supporting documentation Life of loan, more granular data needed Quantifying forecasts of the future 3. Regulators – Aligning CECL To capital management, ALM, budgeting and planning

Transitioning to 2020/21 Governance Engage External Parties Scoping SEC: 2020 Rest: 2021 Scoping Data Measurement & Metrics Processes & Optimize Engage External Parties

What to do now? Educate Communicate with your stakeholders Develop a plan c