As CECL Looms, Banks Are Already Feeling the Effects

May 17 — With the Current Expected Credit Loss standard roughly a year and a half away, banks are already beginning to see the impact the new rule will have on their institutions, particularly in terms of technology investment and credit planning. The new standard, which is being called the largest accounting change in history, will alter how banks estimate credit losses in their portfolio, significantly affecting reported profitability and capital positions.

A new survey from business analytics firm SAS and the Global Association of Risk Professionals found that the majority of banks are already at least starting to consider the implications of CECL. Sixty-five percent reported that CECL has already affected their IT strategy, with many noting that their current infrastructures are insufficient to meet the new requirements.

Currently, many banks use in-house spreadsheets to determine their current allowance estimations, but under CECL, spreadsheets probably won’t cut it.

“It looks like we’re moving from a world where, for the most part, banks are doing estimates using in-house spreadsheets, to one where only a quarter of them (26%) say they’re going to develop their CECL capability in-house,” said John Voigt, principal business solutions manager at SAS, in Complying with CECL: The Banks’ Perspective.  He added that these institutions will likely need to rely on developing more programmatic approaches than they use currently.

CECL prep also appears to be affecting banks’ product offerings (37 percent) and loan pricing strategies (39 percent).

“A truly unintended consequence of CECL is how the standard is already impacting, and will continue to impact to an increasing extent, loan product offerings and pricing as well as the overall availability of credit,” says Randy Rabe, chief financial officer at Hamilton State Bank, Hoschton, Ga. “We think that the day-one loss treatment, the impact of term structure, and the impact of expected losses on unfunded commitments are all driving these unintended consequences.”

Because the effects of CECL will be so impactful, 37 percent of those surveyed reported they would be interested in testing CECL-related processes and technology in parallel with their current systems for a year or longer. (The year-out mark is seven months away, for anyone who’s counting.)

“Like so much of the post-crisis regulatory legacy, implementing CECL is a huge undertaking, requiring a cross-disciplinary, multiyear effort,” said Jeffrey Kutler, editor-in-chief at GARP.

Responses indicated that most bankers agree on the level of prescriptiveness and the scalability of the standard, but institutions still face challenges with the interpretation and implementation of CECL. Almost half reported being least comfortable with data availability and quality, and many also reported facing challenges with lifetime loss modeling and the production process.

Less prescriptiveness means banks have more autonomy in deciding how best to comply. For example, CECL does not require performing discounted cash flow (DCF) analysis, which takes into consideration incoming payment streams and should result in a reduction of reserve requirements. But it is complicated, especially for those still relying on spreadsheets. Nevertheless, 44% of survey respondents said they were planning to use DCF analysis. Since 94 percent of respondents are currently relying on spreadsheets for their current allowance process, it’s no surprise that surveyed institutions of all sizes expressed interest in using a DCF method as CECL approaches.

“A lender benefits greatly from using the discounted cash flow method when its loans or exposures have very high effective interest rates and longer duration, because the
guidance says it must discount cash flows at the effective interest rate,” explains Srini Iyer, director of industry consulting at SAS. “So, the higher the rate, the lower the present value of the future cash flows.”

“Meeting the needs for increased model complexity and enhanced disclosure requirements of CECL while maintaining the necessary controls for financial reporting will demand a higher level of industrialization across risk and finance than is generally applied in most financial organizations today,” said Troy Haines, senior vice president and head of the risk management division at SAS.

For more information about CECL and to register to review the complete survey, click here.


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