How to Go from Panic to Prepared for CECL

The proposed Current Expected Credit Loss (CECL) methodology is a major departure from the way the bank's ALLL had been calculated and is creating uncertainty for institutions. During the final installment of RMA's 2016–17 Credit Risk Management Audio Conference Series, Regan Camp, Managing Director at MST Advisory Services, discussed the reasons behind the panic and offered suggestions for how banks can prepare for this change.

Understandably, CECL is causing trepidation among institutions. People naturally fear change and this is the most significant accounting change in our lifetime, Camp explained. There is no precedence and no best practice to which banks can refer. Plus, the effect on the allowance could be significant. The next two years are critical in the transition to CECL and many have no idea where to start. Camp outlined several steps to help institutions take action:

  • Become familiar with the standard (ASU 2016-13).
    This may sound obvious, but take time to read the standard. Refer to the multitude of explanations and interpretations that exist. Consider leveraging third-party experts and stay aware of potential, forthcoming revisions.

  • Form a CECL steering committee.
    With significant collaboration required across multiple functional areas, it's critical to assemble a team that includes finance, accounting policy, lending, risk, and IT, which will be responsible for developing an expectation of project scope, high-level phasing, and timing. Equally important is to secure strong executive partnership/buy-in.
  • Formulate a project plan.
    Build a CECL blueprint that includes an overview of the current state at your institution, data, methodology, pooling, reporting, and implementation.
  • Conduct a gap analysis and readiness assessment.
    Identify and analyze the gap between the current state (current GAAP) and the future state (CECL), including an analysis of existing data, process, and methodology (models) against the expected guidelines.

Taking these steps will help to alleviate the initial stress that institutions feel about CECL. As planning gets underway, it is important to remain flexible because this is a learning process for all involved.

Prepare for the transition to CECL with RMA's CECL Service, which captures, stores, and reports on loan level loss information.

Join us for the 2017–-18 Credit Risk Management Audio Conference Series which kicks off September 12, 2017.

Washington – The Week Ahead, September 25–29, 2017

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