Financial institutions across the U.S. are grappling with the many changes that will be required to implement the current expected credit loss, or CECL, model. With the extensive amount of time, resources and staff required to successfully transition from the incurred loss model, even getting started can be daunting. During a recent panel discussion hosted by Sageworks and MST on the CECL transition, experts discussed some of the common CECL implementation hurdles that financial institutions have encountered so far, along with some suggestions for overcoming them.
“I think that the primary hurdle is simply a CECL paralysis,” said Regan Camp, managing director of MST’s advisory services department. “It’s essentially that institutions don’t know where to begin or think that there is new found time, as perceived in the extension of the effective date for non-PBEs. Institutions think that it is okay to sit back, relax, and wait. The reality is that institutions will not be able to get where they need to go to get this thing implemented and will start running out of time if the transition process is not started.”
Camp was among the panelists on the webinar, which included two consultants, three auditors and one banker who all shared their various perspectives on common CECL questions that were collected from the audience of more than 480 financial institution employees.
CECL implementation obstacle: Waiting to get started
The primary implementation hurdle Camp discussed was not only a failure to get started but also a failure to get started quickly. He highlighted how this goes hand in hand with a lack of understanding. Many institutions fail to go to the standard itself and rely on other, misguided sources for information. To prevent this, it is important to understand what the standard says, check the boxes required and document the reason for or against certain decisions.
“The latter is just as important as the former. What are the things we considered and why didn’t we go with those? At the end of the day, we’re likely going to be asked those questions from auditors, regulators and examiners. They will be asking why an institution went with a certain election and what else it considered. Institutions will have to show their decision-making processes,” said Camp.
CECL implementation obstacle: Overwhelming data analysis
The final hurdle described, in addition to an initial CECL paralysis, is an analysis paralysis. Many institutions are spinning their wheels when going through CECL implementation, trying to perform all of the required steps exactly right when in reality they are not moving along the way. Camp explained that executives are often tied down with so much analysis that they don’t ever gain any ground and only scratch the surface on high-level decisions.
“For example, an institution may choose a particular methodology and it takes them 5 months to become set on a PG/LGD approach, but then they don’t leave themselves sufficient time to get into the nitty-gritty of what that entails,” said Camp on the webinar. To combat this, he recommends getting to high-level decisions quickly so that there is more time available to go into detail and work through execution steps.
“At the end of the day, I wouldn’t want to be the institution sitting there saying, ‘I have data but I only have data for a couple of years.’ We’ve known about this since 2016. We should have been planning,” said Camp.
Amanda Rousseau, ALLL Marketing Manager at Sageworks