Financial institutions preparing for the launch of the Financial Accounting Standard Board’s (FASB) new current expected credit loss model, or CECL, may have concerns when it comes to preparedness, implications and overall impact. Gavin Harding, Experian’s Senior Business Consultant and Jose Tagunicar, Director of Product Management, tackled some of the tough questions posed by the new accounting standard. Check out what they had to say:
Q: How can financial institutions begin the CECL transition process?
JT: To prepare for the CECL transition process, companies should conduct an operational readiness review, which includes:
- Analyzing your data for existing gaps.
- Determining important milestones and preparing for implementation with a detailed roadmap.
- Running different loss methods to compare results. Once losses are calculated, you’ll want to select the best methodology based on your portfolio.
Q: What is required to comply with CECL?
GH: Complying with CECL may require financial institutions to gather, store and calculate more data than before. To satisfy CECL requirements, financial institutions will need to focus on end-to-end management, determine estimation approaches that will produce reasonable and supportable forecasts and automate their technology and platforms. Additionally, well-documented CECL estimations will require integrated workflows and incremental governance.
Q: What should organizations look for in a partner that assists in measuring expected credit losses under CECL?
GH: It’s expected that many financial institutions will use third-party vendors to help them implement CECL. Third-party solutions can help institutions prepare for the organization and operation implications by developing an effective data strategy plan and quantifying the impact of various forecasted conditions. The right third-party partner will deliver an integrated framework that empowers clients to optimize their data, enhance their modeling expertise and ensure policies and procedures supporting model governance are regulatory compliant.
Q: What is CECL’s impact on financial institutions? How does the impact for credit unions/smaller lenders differ (if at all)?
GH: CECL will have a significant effect on financial institutions’ accounting, modeling and forecasting. It also heavily impacts their allowance for credit losses and financial statements. Financial institutions must educate their investors and shareholders about how CECL-driven disclosure and reporting changes could potentially alter their bottom line. CECL’s requirements entail data that most credit unions and smaller lenders haven’t been actively storing and saving, leaving them with historical data that may not have been recorded or will be inaccessible when it’s needed for a CECL calculation.
Q: How can Experian help with CECL compliance?
JT: At Experian, we have one simple goal in mind when it comes to CECL compliance: how can we make it easier for our clients? Our Ascend CECL ForecasterTM, in partnership with Oliver Wyman, allows our clients to create CECL forecasts in a fraction of the time it normally takes, using a simple, configurable application that accurately predicts expected losses. The Ascend CECL Forecaster enables you to:
- Fulfill data requirements: We don’t ask you to gather, prepare or submit any data. The application is comprised of Experian’s extensive historical data, delivered via the Ascend Technology PlatformTM, economic data from Oxford Economics, as well as the auto and home valuation data needed to generate CECL forecasts for each unsecured and secured lending product in your portfolio.
- Leverage innovative technology: The application uses advanced machine learning models built on 15 years of industry-leading credit data using high-quality Oliver Wyman loan level models.
- Simplify processes: One of the biggest challenges our clients face is the amount of time and analytical effort it takes to create one CECL forecast, much less several that can be compared for optimal results. With the Ascend CECL Forecaster, creating a forecast is a simple process that can be delivered quickly and accurately.
Q: What are immediate next steps?
JT: As mentioned, complying with CECL may require you to gather, store and calculate more data than before. Therefore, it’s important that companies act now to better prepare. Immediate next steps include:
- Establishing your loss forecast methodology: CECL will require a new methodology, making it essential to take advantage of advanced statistical techniques and third-party solutions.
- Making additional reserves available: It’s imperative to understand how CECL impacts both revenue and profit. According to some estimates, banks will need to increase their reserves by up to 50% to comply with CECL requirements.
- Preparing your board and investors: Make sure key stakeholders are aware of the potential costs and profit impacts that these changes will have on your bottom line.