Is your firm ready? Financial institutions are seeking answers that will help them plan a roadmap for implementation of the new current expected credit losses (CECL) standard issued by the Financial Accounting Standards Board (FASB).

“The runway looks long but firms need to start to prepare now,” said Anna Krayn, Team Lead for Impairment, Capital Planning and Stress Testing at Moody’s Analytics. She was the second of three panellists at the webinar “The Long Road to CECL” sponsored by the Global Association of Risk Professionals on September 8, 2016. “Now is the time to educate, organize and govern, quantify, and automate.”

Regardless of firm size, nowadays most loss provisions wind up in a spreadsheet, for calculation or assembly, according to Krayn. It has worked so far because of the “prevalence of historical loss / segment level models,” she noted. However, this might be a good time to abandon those spreadsheets.

“While FASB and US banking regulators have communicated that a wide range models will be allowed under the new regulations, a granular approach is encouraged,” said Krayn. “With the potentially increasing complexity of calculations, most firms will have to take a good, hard look at their current systems,” she said.  One reason for complexity is that “qualitative overlays or Q factors” are included in loan loss estimation, and these involve forecasts.

“Computationally, there will be a lot of complexity due to running in parallel—and also new requirements,” she warned. “Manual checking will be a strain. Firms will look to automate” as much as possible.

“The time line for adoption is a big thing” especially for those firms that are subject to both standards, Krayn said.  Multiple parallel processes could be starting as early as 2017, for the IFRS 9 deadline of 2018. The CECL implementation deadlines are 2020-2021.

Krayn discussed data capture considerations pertaining to three areas:  model development, calculation, and the qualitative overlay. “The level of granularity and choice of methodology are interrelated,” she noted.

For quarterly reporting, firms will be under the gun. They have as few as ten days to get the data, run multiple scenarios, adjust with overlays, and draft the management narrative.  Conclusion: “Process automation is critical.”

Are you ready for CECL? At the start of the webinar, GARP conducted an informal poll among the members of the audience. At the end of the webinar, Krayn revealed the results. She said 37 percent have not yet begun preparing for CECL. About 50 percent say they do not think they have enough information. “Perhaps they lack clarity from the stakeholders,” she said. Now is indeed the time to prepare. ª
 

Click here to view the recorded panel discussion, The Long Road to CECL: Implementation Considerations.

Click here to read about the first presentation.

Click here to read about the third presentation.