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Developing a CECL-compliant model means more than just selecting a new methodology; it means assembling and analyzing data on which to base decisions that will have an enterprise-wide impact on the institution.
CECL is here. And the time to get ready for the Current Expected Credit Loss Standard is now. Your implementation date might be a few years away and there's a reason that the Financial Accounting Standards Board has scheduled those years out: to give banks the time they need to determine, test, and implement CECL-compliant models.
"This is not a tweak for anybody or any bank," said Steven Merriett, chief accountant at the Federal Reserve System. "You are not already doing it. Your allowance is not already sufficient to qualify under CECL. This is going to take a ton of work."
Indeed, CECL is considered the most impactful banking regulation since Dodd-Frank. Analysts predict the core CECL requirement-to estimate lifetime expected losses for all loans from inception-will result in allowance increases. In a 2015 year-end banking survey conducted by Mainstreet Technologies (MST), 93% of the respondents agreed CECL will result in an increase in their allowance for loan and lease losses (ALLL).
Creating a CECL-compliant model means more than just selecting a new methodology. It means assembling and analyzing data on which to base decisions that will have an extensive, long-term, and enterprise-wide impact on bank operations.
MST developed a seven-step program and associated timeline to guide institutions through the process of developing their CECL-compliant models. MST wanted to be able to identify what each client needed to do to become CECL compliant. As the program evolved, the question became, what will any bank or credit union need to do? So MST sought input from some of the leading national accounting and auditing firms.
The result was an online tool that allows financial institutions to visualize their own timeline en route to a CECLcompliant model for estimating the allowance. In a graphically presented "calculator," the tool proposes likely steps toward a compliant model and asks how much time is needed to accomplish each step-and, in the process, provides supporting documentation of due diligence in selecting and implementing a CECLcompliant methodology for allowance estimation.
The Seven Steps
The immediate and pressing need...