cecl: are you where you need to be?
TRANSCRIPT
CECL: Are you where you need to be?What you need to know in preparing for the current expected credit loss
model
John Robertson- Senior Business Process Consultant, Advisory Services John Closs- Executive Vice President - MST
CECL is built on the
same foundation of
information as the
incurred (aka historical)
loss model.
CECL basics
For CECL, these historical
losses must be adjusted
beyond the reporting date,
looking forward according
to what is ‘reasonable and
supportable.’
CECL basics
Why the change?
GAAP requires an “incurred loss” methodology. Delayed recognition until it is probable a loss has been incurred. GAAP restricts recording credit losses but not yet meet the “probable” threshold. Users analyzed credit losses by utilizing forward-looking models. FI’s could not record credit losses that had not yet met the “probable” threshold. Age old problem - conflict between safety and soundness and taxable income.
What will change under CECL?What you should expect:
Banks will have to predict future losses.
Bankers will reserve for a loss from the day a loan is issued.
What can I do now?
Consider the data collection needs. Single most important is the process of capturing and storing
loan-level detail and transactional information on a regular
basis.
Assemble data on two primary levels…
Key to CECL is assembling data on two primary levels
Data on a loan level of losses over time
Loss rate by loan type.
Loss patterns by loan type.
Correlations with key economic metrics
and associated losses.
Data on a loan level of duration
Loss patterns under different economic
and interest rate environments.
Prepayments under different economic
and interest rate environments.
Gathering the information and saving it
Financial institutions with insufficient amounts of data.
Turn to call reports as a starting point even if it’s not be loan level data.
Start gathering that information in detail right now.
Have your service provider start saving the data.
Having detail gives you flexibility.
Historical data requirements for CECL are expected to be five years or more.
Loan data surrounding historical losses
Probability of default stats Loss given default stats Loan-level detail for net losses Loan rating/grade Was a loan TDR? Or impaired? Delinquency status Loan to value Prepayment experience Information on unique products or loan structures Date info, like first past due, first classified as non-accrual, etc.
Economic ForecastingSteps to develop a “reasonable and supportable” forecast.
1)Identify the relevant economic metrics that drive losses for different segments of loans.
2) Identify economic forecasts for the selected metrics.
Economic ForecastingSteps to develop a “reasonable and supportable” forecast.
3) Translate to loss information using correlations and lags identified in historical data.
Economic ForecastingSteps to develop a “reasonable and supportable” forecast.
Economic metrics to consider
Real gross domestic product Nominal gross domestic product Nominal disposable personal
income Unemployment rate Commercial real estate prices
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CECL Implementation: Seven Steps to Consider
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Data Management
Data Interfaces
Transparency
User Acceptance
Systems/ Methodology Controls
Solid foundation from which to move forward
Incurred Loss 2020 - 2022
1ALLL
Automation
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Implement a Shadow Loss solution
Begin testing pool segments based on vintage and other cohorts
Project loss with migration analysis or other method based on historical data
Correlate default and loss data economic information
Apply forecasts
Run quarterly and reconfigure as needed
Go live 2019 - 2022
2CECL
Modeling
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“We anticipate modeling for CECL to take us one year.”
Muneera CarrComerica, EVP & CAO
2016 MST National ALLL Conference
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Reports: governance & oversight
New model/ methodology Policy
Establish Document
Execution Responsibility Owner Oversight
Output
Consistency between actual and documentation
3DevelopReports
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Rewriting/ documenting policies What is the method? How does the model work? Who is responsible? What department?
Define model controls
Use of outside resources
Models break
Excel just reports a bad number
4Document
Process
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Loan originations will create immediate accounting events
Develop and validate disclosures
Disclose Segment method and rationale Forecast (correlations and duration)
5Assess
Impact on ICFR
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“Preparing for CECL now will bring greater value to your institution, it will be a lot easier to start testing different types of models…giving you the
flexibility to determine what might work and what might not.”
Dan HarachWestern Alliance Bank, VP Portfolio Management
MST 2016 National ALLL Conference
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Possible allowance increase impacts all corners of institution
Profile change and loan portfolio
Lifetime losses may dictate product offerings
Future loss estimates may impact capital planning
Variations in reserves based on forecasts need to be explained
6Capital
Planning
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Comprehensive understanding/ practice of guidance
Pre-planning
Who or what departments are delegated with responsibility
Historical data, correlations (forecasts), external data
Parallel for a reasonable timeframe
Oversight and adherence
Auditors and regulators will guide and not recommend
7Audit &
Regulatory Approval
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CECL Implementation – Deadline“The extension will raise expectations for
success.”
Rahul Gupta(former) FASB CECL Project Manager
MST 2016 National ALLL Conference
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May 22, 2016Conference Poll
March 16, 2016 Webinar Poll
December 2015 Email Poll
67%63% 58%
Respondents who have not begun preparing for CECL.
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Do you plan to use Excel or a 3rd party software to estimate your allowance under
CECL?
May 22, 2016 Conference Poll
March 16, 2016 Webinar Poll
December 2015 Email Poll
76%82% 58%
Is your financial institution ready? Start collecting data now Ensure key data are gathered and governed Coordinate credit risk management metrics with CECL Understand the impact of the forward-looking requirement and vintages
Don’t wait!
THANK YOU
Optimize,
Change, Innovate#BHCM16@bakerhill
For more information, visit our Solutions Showcase, or, contact your presenter at [email protected]
APPENDIX
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Respondents indicating they will need more than 8 years of historical data.
May 22, 2016 Conference Poll
March 16, 2016 Webinar Poll
December 2015 Email Poll
Most were unsure48% Was not
asked
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Respondents who expect their allowance to increase under CECL.
May 22, 2016 Conference Poll
March 16, 2016 Webinar Poll
December 2015 Email Poll
80%73% 74%
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Do you use Excel or software to estimate your allowance today?
May 22, 2016 Conference Poll
March 16, 2016 Webinar Poll
December 2015 Email Poll
55%56% Was not asked