CECL As a Strategic Business Initiative
Do you have the right data to proactively approach CECL and accomplish strategic growth objectives?
Implementing the new CECL standard is expected to have broad implications that may affect numerous functions at banks and credit unions, including credit modeling, regulatory capital impact, operational implications, financial and regulatory reporting, and data and technology considerations. This has many financial institutions concerned as it could mean a significant increase in the loss allowance, which could impact their net income.
However, rather than view CECL as another regulatory headache, it could be viewed as an advantage. According to the American Bankers Association, CECL could help position banks to have more control over capital and minimize earnings volatility. Despite all the challenges CECL will bring about, ABA 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 only to comply with CECL, but also to successfully leverage it as a strategic business initiative will hinge on having access to quality data.
Do You Have the Right Data?
Banks and credit unions must first ensure they have the data that allows them to capture a longer view of risk and understand how it will affect their 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. Additionally, risk attributes and collateral information, like collateral type, amount, guarantees and risk rating, could play critical roles, as well. Institutions must analyze historic data sets in order to identify and supplement potential data gaps. Identifying and closing any data gaps should be a priority, as should building out a robust loss history on a going forward basis.
Quality data will play a critical role in institutions’ management of their portfolio and their CECL strategy. Not only will CECL require robust historic data but institutions’ ability to assess the viability and relevance of that data will be critical to their efforts in proactively managing the impact of CECL. Banks and credit unions must establish strategies to mitigate any inconsistencies in their data. These could include supplementing with outside information or using data points unique to segments of their portfolio, etc. The data required to drive and forecast accurate future losses will likely differ between portfolio segments. Understanding their data across their portfolio will also allow them to improve their portfolio segmentation strategy. By doing so their data will be easier to use in developing trend analysis at a more detailed level and in allowing them to develop CECL strategies unique to their portfolio segments.
Minor inconsistencies can also pose problems. Ensuring consistency in the data will eliminate any unnecessary headaches down the road.
CECL clearly presents challenges for financial institutions, but there are significant advantages that can be gained when addressing it. Banks and credit unions should not view CECL as another regulatory box to check, but rather an opportunity to gain a true competitive advantage.
Institutions must view CECL as a strategic business initiative. This is an opportunity to empower your institution to confidently calculate forward-looking loss estimates, resulting in an optimally-sized reserve with minimal income volatility. Moving beyond compliance and addressing the true intent behind CECL, which is to help financial institutions better manage risk, will ultimately support improved underwriting, loan pricing and even enhance portfolio profitability – and it all starts with data.
Posted on Friday, March 29, 2019 at 11:45 AM
by Rob Foreman
Rob Foreman is a solution consultant with over 10 years of practical experience in the finance and banking industry, and serves as Baker Hill's subject matter expert for CECL. Rob has had broad experience in banking working on high visibility projects, serving both commercial credit and finance as well as accounting areas. Between his experience as an analyst and his responsibilities for the reserve/ALLL process, he brings a true life of loan appreciation to the solution consultant role.
Rob received his Bachelor’s in Finance from Illinois State University and his MBA from the University of Illinois. Rob’s first foray into the technology industry was during his MBA’s global consulting program where he served as consultant to a tech incubator in South Africa.