Examiner Expectations with CECL

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The topic on everyone’s to-do list as of late has been to start thinking about the looming changes that will be here before we know it…the new Current and Expected Credit Losses (CECL) model for the allowance for loan & lease losses (ALLL).

I recently attended the AICPA’s conference for banks and savings institutions. All of the major agencies were represented at the conference—with regulators from OCC, FRB, FDIC, and personnel from FASB and PCAOB. Each of the agencies had CECL on their agendas. Here are some of the most relevant responses to the FAQs surrounding CECL.

FASB & PCAOB Address “Why”

  • Why CECL?

    • CECL is a sensible solution to give investors a good and accurate picture of current and expected credit losses.
    • Remember, the “grand total” of losses are equal between the current ALLL modeling and CECL modeling (i.e. in the long run, all losses will be equal, just recognized sooner).
    • CECL is a much “healthier” way to calculate the ALLL (as losses will be recognized sooner).
    • CECL improves comparability and takes the mystery out of when to book a loan loss.

Regulators Clarify “What”

  • What will you look for when examining banks for the first time once CECL takes effect?

    • Examiners will not assess whether the bank’s forecast was correct, as no one can predict the future.
    • Examiners will look to ensure that the bank has made a “good faith effort” at implementing CECL.
      • Good faith effort examples include: assembling a team, implementing a plan, identifying issues/challenges, and using the resources they currently have in place.

It is expected that CECL will evolve as time goes by. Examiners are open to all methods of CECL – they are not prescribing methods or restricting which method you choose.

Other FAQs:

  • Do examiners want banks to use third-party vendors?

    • Examiners have no preference on the use of third-party vendors.
    • If a bank chooses to use a third-party vendor, remember to follow guidance on the due-diligence and other responsibilities that come with using a third-party.
    • Management remains responsible for the estimate, no matter who calculates it.
  • Is it unacceptable for a bank to use purely historical data?

    • Yes – you must use some type of forecasting.
    • Be sure to periodically review your forecast period (don’t set it and forget it).
  • Which methods should we use to calculate the estimate?

    • Do not try calculating the estimate under all of the methods, only choose the method that results in the lowest number.
  • What if I chose a method and want to change to a different method?

    • That is acceptable, but the change must be well-documented and infrequent.

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