Much like winter, preparing for the current expected credit loss (CECL) is looming. As sure as winter will be here any day now, CECL will become effective in 2020 or 2021 (depending on the institutions characteristics). This may seem far off for some of you, but a plan needs to be put in place now detailing how this new credit loss standard will be integrated into your bank. Failure to do so could result in misstatements and improper evidence and documentation.
Below are some first steps to consider for the new CECL implementation:
- Determine your bank’s effective date.
- Educate your directors and staff.
- Form a CECL committee, including people from all functions of the bank. Schedule and hold meetings now to begin and properly execute a plan.
- Create a timeline for implementation.
- Determine what data is relevant and should be collected, the steps needed to collect the data, and a plan for how you will house that data.
- Think about the model you will use, and consider if you will create your own model or engage with a vendor.
a. Disaggregate portfolio—for example, portfolio segment, class of asset, etc.
b. Further disaggregate—for example, categorization of borrowers, financial asset, industry, type of collateral, geographic distribution.
c. Apply credit-quality indicators—for example, credit scores, internal credit grades, loan-to-value, collection experience, collateral.
d. Apply loss statistic based on collected data. Many models are available, but there are no specific requirements in the guidance. Remember, your model only needs to be as complicated as your bank.
e. Experiment with different models to determine which is best for your bank and most accurately reflects the needed estimated reserve. - Get your plan and model vetted with your Board of Directors and then with the regulators.
- Evaluate and plan for the impact on regulatory capital.
As is expected with such a complicated change in accounting standards, there remain countless questions and concerns for implementation. The FDIC issued an updated Financial Institution Letter (FIL) in September 2017 to help addresses these questions and concerns. The FIL can be found by following this link: https://www.fdic.gov/news/news/financial/2017/fil17041.html.
This article was originally Co Authored by Chuck Marshall and Melissa DeDonder.
Should you have any questions or would like assistance with implementation, please contact Jack Matthis at 731.686.8371 or jmatthis@atacpa.net.