The End of the Educated Guess - Part Two

The End of the Educated Guess - Part Two

Knowing which information already exists is the first step in identifying gaps that need to be filled. Organizations can start getting ready for CECL now by collecting detailed historical data on as many loan types as possible, and as far back as possible. Bigger banks may already have the tools and processes in place to capture this sort of information, while smaller institutions should evaluate their ALLL automation systems to determine whether their software is up to the job of capturing CECL inputs or if it needs to be upgraded or replaced.

Banks know how to capture historical data, so that first step won’t be overwhelming for most. Predicting future risk is the tricky part, and it’s going to take preparation and research to move forward with confidence.

The philosopher George Santayana said, “To know your future you must know your past.” He probably wasn’t referring to CECL, but his words apply here. Forward-looking estimates depend on the mapping of historical loan data to economic trends, such as rising or falling interest rates, a thriving or struggling economy, a healthy or weak real estate market, and so forth. Risks specific to a loan type or even a geographic area also must be considered.

With data and research in hand, lenders can gain insight into how their losses have tracked against macro indicators in the past and then use that intelligence to prepare for potential future outcomes.

Read Part 1 - The End of the Educated Guess here