Prepare for CECLwritten by Blair Groves

One year ago, the Financial Accounting Standards Board (FASB) gave final approval to a new Current Expected Credit Loss (CECL) standard that drastically changes the way banks will calculate provisions for loan losses. As a result, it’s expected that banks will have to significantly increase their Allowance for Loan and Lease Losses (ALLL), in turn, reducing bank’s capital.

The CECL implementation dates are still several years away: 2020 for companies that file with the SEC, 2021 for public business entities that don’t file with the SEC, and 2021 for private and non-profit companies. However, given the significant changes that CECL will bring, management should start preparing now.

You should begin planning for what data you will need and how you will go about analyzing it in order to conform with CECL. Banks will be expected to use their own historical credit data, which is why it must start to be collected now.

Your data will most likely need to be compiled by line of business and broken down by industry and property type as well as asset quality rating (AQR). You will most likely find that this will require that you use a granular AQR framework that clearly demonstrates the probability of default, bank exposure at default and loss given default. Your framework should go beyond just the standard regulatory categories to include multiple sub-categories of rankings within those.

Also, data must be gathered at the individual loan level unless you can demonstrate pools of homogenous loans based on historical experience (like mortgages). Going forward, qualitative factors should be incorporated into your estimates for expected loan losses.

Please contact us if you have more questions about how you can best prepare for CECL 417-881-0145.

To read more about CECL, click below:

Is Vintage Analysis the Key to CECL

The CECL Standard – It’s Real This Time