2020 was an unprecedented year. Just when you finished creating a budget, it was decimated by the economic crisis. From there, time was spent reforecasting, helping allocate PPP loans, and adjusting to changing rate environments. Fast forward a year, and we’re slowly starting to get back to business as usual.
In addition to the usual financial planning, what do regulators want you to focus on in 2021? For most financial institutions, it’s going to be CECL.
As outlined by FASB’s Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (TOPIC 326), the new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Per this Office of the Comptroller of the Currency (OCC) Bulletin, “the new accounting standard applies to all banks, savings associations, credit unions, and financial institution holding companies (hereafter, institutions), regardless of size, that file regulatory reports for which the reporting requirements conform to U.S. generally accepted accounting principles (GAAP).”
But why start now? Whether we like to admit it or not, FASB’s deadline to fully implement CECL is right around the corner.
There are three reasons that require you to plan for CECL NOW.
- FASB and Regulators are expecting at least one year of history running parallel calculations with your CECL model.
To meet regulators’ expectations, you’ll need at least one year of history. Sounds easy enough, right? If you wait too long to commit to a system, it will likely be too late to aggregate an acceptable amount of history to support your CECL results. To ensure you’re prepared, start your search for the right solution now!
- You’ll need time to get familiar with the new process.
Beyond history, you’ll need time to adopt a model and process for CECL within your institution. Clearly, this is something that takes time. Some solutions are expensive, complicated, and require a long implementation process. Who wants to get up and running on a system just to find out it’s cumbersome, inaccurate, or difficult to manage? These complications can be avoided by giving yourself enough time.
Apart from adopting a model, the process itself will be different. Unlike the current ALLL process, CECL is designed to bring together different areas of the bank (credit, finance, accounting, risk, etc.) to provide a holistic assessment of credit risk.
- Examiners are already asking for your CECL plan.
At Plansmith, we work with thousands of banks and credit unions and talk with our clients every day. The noteworthy client feedback is that examiners are already asking about their plans to address CECL. You will likely have to illustrate what you’re planning to do in your upcoming exam.
We understand that getting started with CECL may feel overwhelming. Our CECL clients tell us their key takeaway is to avoid expensive or complicated options – instead, seek out a user-friendly solution. That’s why every detail of Plansmith’s CECL calculator is designed with our client in mind. Here’s a list of features from our solution that you may want to look for when choosing your provider:
- Uses Weighted Average Remaining Maturity (WARM) Method
- Leverages historical Bank Call Report or Credit Union 5300 Report data
- Computes loss allowances under current or future CECL environments
- Automated peer group analysis provides loss rate comparisons
- Web-based platform requires no software or core integration
If you’d like to discuss your personal CECL needs or schedule a demo of Plansmith’s solution, email us at firstname.lastname@example.org.