Pricing and Profitability – The Other Side of CECL

It is extremely hard not to run into a Current Expected Credit Loss (CECL) article, webinar or whitepaper these days! This new FASB standard has a lot of financial institutions looking for answers and consultants anywhere they can find them, and some institutions do seem a bit overwhelmed—and rightfully so. Back in 2015, Deloitte conducted a survey of hundreds of U.S.-based banks and asked them about concerns around CECL.  Concerns that made it to the top included:

• The necessary level of coordination between finance, credit, risk, IT, and others to execute the implementation
• Availability of data
• Capacity to design, build, and test new models with limited internal resources with the expertise required
• Capability to plan and execute a program of this size in parallel with other current initiatives

Fast forward to today and these are still the top concerns that I hear. So who does a bank look to for help with CECL? It may sound strange, but I think one of the best places to look is at the folks internally who are running your pricing and profitability efforts! That’s right. You need to flip CECL on its head and instead of looking at the expected loss, you need to look at expected profit. In fact folks, I think I will coin the phrase Current Expected Credit Profit, or my new favorite acronym CECP (not yet found on Google, in this context).

First, you cannot do commercial relationship pricing effectively without involving finance, credit, risk, and IT. Go and ask the people handling your pricing how they have managed and developed those relationships. They will be able to help point you in the right direction, which will help any CECL implementation.

Second, data, data, data. Enough said. But to restate the obvious, you need data for almost anything—especially accurate relationship pricing. Granted, you may not need historical data as much, but you need data, and you need the know how to obtain and manage that data.

Regarding capability: I have never seen a bank with a large pricing and profitability department. Managing pricing and profitability was my first job at Zion’s Bank back in the day—and it was the best job ever for someone wanting to know how a bank worked. In this role, I had access to the people, data, and systems that brought the entire commercial pricing relationship together. However, it was just me when it came to “full-time job” status. Yes, it took a village in terms of data, but no one else was assigned or focused on driving to the end goal of knowing what our profitability looked like. Unfortunately, when I speak to a lot of banks, if there is a pricing and profitability team it doesn’t have a very deep bench either. Again, leverage the experience of these pricing and profitability folks to help address a CECL initiative. They know what it is like to run lean, so take advantage of that.

So, flip CECL on its head and look at the Current Expected Credit Profit or CECP for help with this new FASB standard.  Besides, revenue is more fun to deal with than loss!

Author Bio

With more than 25 years of experience in the financial services industry, Mike Horrocks possesses a unique and extensive blend of financial expertise, technology skills, process redesign abilities and solution management experience. Horrocks’ background enables him to create go-to-market strategies for new solutions, help clients convert strategies into revenue generating initiatives and forecast market direction.

As the Vice-President of Product Management at Baker Hill, Horrocks’ responsibilities include the identification and development of new market opportunities in the business of lending, risk management, and analytics for financial institutions. Mike holds a MBA both in International Finance and Venture Technology Management from Indiana University and a B.S in International Finance from Brigham Young University.

Before joining Baker Hill, he held executive positions within several other organizations, including Experian, Profit Technologies, SAIC, Broadway and Seymour (FIS), Zions First National Bank and Zions Data Corporation.

Horrocks is a member of many associations including the Risk Management Association and Bankers Without Borders. In his free time, he enjoys traveling internationally with his wife and five children.