7 Strategies for Achieving Balanced Loan Growth – Part 5
CECL as a Strategic Business Initiative
In our last post in this series on lending strategies, we covered deal pricing and efficient loan origination. Today, we’re moving onto CECL and how it looks to shake up the banking industry.
CECL as a strategic business initiative is a big topic that will only get bigger. CECL will likely affect banks and credit unions across many different areas and departments, including credit modeling, regulatory capital impact, operational implications, financial reporting, technology investments and so on.
Since CECL requires financial institutions to calculate the expected loss over the life of each loan and set aside reserves to cover those losses at the time of origination, it is without a doubt one of the biggest changes to bank accounting.
Rightfully so, banks and credit unions are concerned this change will require a significant increase in the loss allowance on their loans, thus impacting their net income. In fact, research from S&P Global projects that the industry may need to increase its reserve levels up 1.5times the reserve amount under the current model -approximately $246 billion.
While one could view CECL as another regulatory headache, there is also a serious competitive advantage for the financial institution that understands the risk and costs associated with its loan portfolio.
Not just data, but the right data
To successfully leverage CECL as strategic business initiative, there must also be access to through and worthwhile data. This allows banks and credit unions to have more control over capital and minimize earnings volatility. In order to reap these benefits, financial institutions need to gain a longer view of risk and understand how it will impact portfolios.
Data elements that detail the contractual terms and value of a loan or credit product, like variable or fixed rate and amortization schedule, will obviously be needed, but risk attributes and collateral information, like collateral type, amount, guarantees and risk rating, will also be critical.
Institutions must determine what pieces of data are missing and what data is readily available. Identifying gaps should be a priority, as holistic views of loan data give institutions multiple advantages.
Data accessibility is key
Having access to the right data is crucial, making obtaining the data only one piece of the puzzle. Banks and credit unions would benefit from creating teams within their institution from various departments to locate data points and determine how to access them. These departments including IT, finance, accounting, asset/liability and credit. Each member of the team should be aware of the institution’s data governance policies to ensure quality expectations and data ownership responsibilities are clear.
Quality over quantity
Assessing the data is critical, as is making sure it’s consistent and of quality. Having data and knowing where it resides is only the first step. Establishing a protocol to mitigate any inconsistencies will be key for banks and credit unions. This allows for institutions to better identify trends in their portfolio and make the data easier to use.
Issues that can hinder institution’s ability to monitor and predict the performance of a loan portfolio include things like missing amortization schedules, data stored on paper or in Excel spreadsheets, or incorrect collateral codes. Discrepancies in how loan data is entered will make it harder to segment the portfolio and cross-analyze data sets, making even minor inconsistencies problematic. Ensuring consistency in the data will eliminate any unnecessary headaches down the road.
Baker Hill NextGen® CECL integrates with Baker Hill’s lending and risk management solutions, providing you the engine to power your CECL needs. Learn more today on how you can establish and monitor loan pools to measure expected credit loss and its impact on your institution's performance.
If you need to catch up on parts 1, 2, or 3 and 4, you can do so now! You can also download the full eBook to find out all seven strategies today.
Posted on Tuesday, June 1, 2021 at 2:15 PM
by Baker Hill