H. Marcus Lee, US GAAP Accounting Lead, TCS Financial Solutions
The Financial Accounting Standards (FASB) has proposed a new impairment standard known as the Current Expected Credit Loss (CECL) model, which will profoundly change the way banks record their Allowance for Loan and Lease Losses (ALLL). Instead of the backward-looking incurred loss approach currently in place that extrapolates past losses to estimate future losses, the forward-looking CECL model will require banks to estimate expected losses using a more dynamic set of indicators.
At inception of each loan, banks will need to consider relevant internal and external information to determine “reasonable and supportable” forecasts to support their CECL estimates. Many industry experts believe CECL will increase the ALLL reserve by 30% or more, and that a one-time capital adjustment will be needed to account for the change.
Financial institutions may begin applying CECL methodologies in 2019. Any publicly-listed financial institution that files with the SEC must be operationally ready for CECL by 2020. Other financial institutions have until 2021. CECL poses significant operational and management challenges. Financial institutions will have to implement new processes, and find people with strong statistical modeling skills.
New data points will be required from internal stakeholders and external data providers, and these will need to be vetted and merged in a cost-effective manner.
Are banks ready for the operational challenges posed by CECL? The time to act is now.
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