7 Strategies for Achieving Balanced Loan Growth – Part 5

7 Strategies for 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 diving into a big topic that will get only bigger, CECL as a strategic business initiative. CECL will likely affect banks and credit unions across many different areas and departments, not limiting credit modeling, regulatory capital impact, operational implications, financial reporting, technology investments and so on.

Like a broken record, it has been repeatedly stated that this is one of the biggest changes to bank accounting – and it is. 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. 

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 to $246 billion – 1.5 times the reserve amount under the current model. 

However, rather than viewing CECL as another regulatory headache, there is a serious competitive advantage for the financial institution that understands the risk and costs associated with its loan portfolio. Even the American Bankers Association argues that “rich data used to create CECL models will allow financial institutions to price their products more accurately, again creating an opportunity to bolster profitability by creating products that better suit the needs of borrowers and lenders alike.” 

Not just data, but the right data 

While CECL has the potential to help position institutions to have more control over capital and minimize earnings volatility, to successfully leverage it as a strategic business initiative will hinge on having access to quality data. This means banks and credit unions must first ensure they have the right data to gain a longer view of risk and understand how it will affect its portfolio. 

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 data is available and which data elements are still needed. Holistic views of loan data give institutions multiple advantages, so identifying and closing any data gaps should be a priority.

Data accessibility is key

Having the right data is only part of the puzzle. Having access to it will be crucial. Banks and credit unions must create teams from various departments within their institution to locate data points and determine how to access them. Stakeholders from accounting, finance, IT, credit and possibly even the asset/liability committee should be included, and they should all be aware of the institution’s data governance policies to ensure data ownership and quality expectations are clear.

Quality over quantity 

Having data and knowing where it is still isn’t enough. The data needs to be consistent and of quality; therefore, assessing the data will be critical. Banks and credit unions must establish a protocol to mitigate any inconsistencies. In doing so, the data will be easier to use, and institutions can better segment to identify trends in their portfolio. 

Issues like missing amortization schedules, data stored on paper or in Excel spreadsheets, or incorrect collateral codes can hinder an institution’s ability to monitor and predict the performance of a loan portfolio. Even minor inconsistencies can pose problems, for instance, discrepancies in how loan data is entered will make it harder to segment the portfolio and cross-analyze data sets. 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.