The Financial Accounting Standards Board is replacing the current “incurred loss” accounting model with a “current expected credit loss” model, or CECL. The new and more complex model, slated for implementation beginning in 2020, will likely present a technological challenge for many banks. According to the American Bankers Association’s overview on the subject, this standard is “expected to have a huge impact on the costs to prepare and audit the allowance for loan and lease losses.” This standard is also expected to add expense to how investors analyze the ALLL and how banks manage their capital.
Estimates on the impact of the rules vary. The ABA considers the extent of the change is unknowable until fully implemented. Add to that the winds of economic change and estimates become even cloudier. What is fully understood is that CECL requires significant changes to how a bank maintains and analyzes its data, which increasingly involves tech tools.
BankBeat spoke with Michael A. Stinson, CEO of BankTrends, a company that specializes in data analysis tools for community banks, about CECL and why its complexity is making automated analysis an alluring proposition.
Q: Has the timing of implementation for CECL changed since 2016? How are banks preparing?
Michael A. Stinson: The final standard from FASB set three effective dates for CECL and most banks will begin implementing during 2020. However, CECL represents the “biggest change in accounting history” and, accordingly, regulators are telling institutions that they should not wait until the last moment to prepare for CECL and are encouraging banks to start their CECL process now. This will allow institutions time to run their new CECL calculations alongside their current model to evaluate changes and refine their assumptions.
Q: What forces are influencing the development of automated CECL? What, in general, might be preferable about automation?
M.S.: This depends on the size of the institution and the complexity of the loan portfolio. Generally, the bigger the bank the more granular their data needs, and for regional or mega-banks they will definitely be analyzing their reserves at the loan level. For the uncomplicated community banks, there is quite a bit of automation that can be done in regards to CECL, and Call Report data represents a great option for these banks. Additionally, most community banks have a loss history that can be described as ‘sporadic’ without ‘predictive patterns.’ In these situations it is imperative to consider peer group loss rate data, and Call Report data provides a wealth of this information.
Q: What have been the specific challenges for community banks working through the new rules and how might automation help them in particular?
M.S.: Knowing where to start, what data to collect, and what methods for calculating loss histories are the primary challenges community bankers are facing in regards to CECL. Additionally, under CECL bankers must consider future economic conditions and how those factors will impact their loan losses. This is a tall order for most banks on top of what they’re already doing on a daily basis.
Q: Describe some of the complexity of CECL and what regulators think about implementing accurate accounting for it, automated or otherwise. Do regulators prefer an automated solution?
M.S.: The regulators have said that uncomplicated institutions do not need a complex model to implement CECL, and that if properly done, the allowance can be done using spreadsheet methodologies. That is something we at BankTrends completely agree with. A goal is to help bankers avoid the errors and data collection efforts of using a spreadsheet model. Plus, by automating the process it makes it easy to layer in peer comparisons.
Q:What else should bankers know about CECL before the standard becomes reality?
M.S.: If you didn’t attend the recent FDIC teleconference geared toward uncomplicated institutions, it would be worth your time to register and watch the recording as you contemplate your next steps toward CECL readiness.