Challenges to

Implementing CECL
Mark Jordan, Senior Manager, FI Consulting
Robert Chang, Senior Modeler, FI Consulting
Gurinder Tamber, Business Development Director, FI Consulting

Global Association of Risk Professionals

November 2018
The views expressed in the following material are the
author’s and do not necessarily represent the views of
the Global Association of Risk Professionals (GARP), its
Membership or its Management.

© 2016 Global Association of Risk Professionals. All rights reserved. (12.15.16)

Disclaimer

 The views expressed herein are those of the individual

authors and do not necessarily reflect the views of GARP
or FI Consulting.
Current Expected
Credit Loss (CECL)
 Current Expected Credit Loss
(Accounting Standards Update (ASU) 2016-13)
What is it?
A new accounting standard for US GAAP entities that requires booking the expected lifetime
loss of credit instrument at the time of origination
Who has to comply?
Public business entities (2020 and 2021) and non-PBEs (2022)

Why the change?

To correct the perceived pro-cyclicality of today’s ‘incurred loss’ approach which does not
allow for capital build-up in anticipation of economic distress

4
 Incurred Loss
(FAS 5/FAS 114)

today

A loan is impaired when, based on current information and events,

it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement (FAS 114)
 Current Expected Credit Loss
(ASU No. 2016-13)

today

The measurement of expected credit losses is based on relevant information about

past events, including historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectibility of the reported
amount. An entity must use judgment in determining the relevant information and
estimation methods that are appropriate in its circumstance (CECL)
 Lifetime vs Incurred Allowance, FY 2002-2017
2.50%

2.00%

1.50%

1.00%

0.50%

0.00%
2002 2004 2006 2008 2010 2012 2014 2016

Incurred Allowance Actuals

The incurred allowance has a 1-year loss emergence period and does not incorporate future information.

*Based on Commercial Business Loans Originated from 1992 – 2017

7
 Lifetime vs Incurred Allowance, FY 2002-2017
6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2002 2004 2006 2008 2010 2012 2014 2016

CECL Allowance Incurred Allowance Actuals

The reserve for the lifetime allowance is already increasing a few years before the financial crisis..

*Based on Commercial Business Loans Originated from 1992 – 2017

8
 Lifetime vs Incurred Allowance by Loan Age
4.00%

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Loan Age

CECL Allowance Incurred Allowance Actuals

9
 The
Challenge
Building a durable, compliant CECL
process and defending your rationale
and results to auditors, the board and
investors.

10
 Four Pitfalls to Avoid

1 2 3 4
 Pitfall #1 Delaying or shortcutting your
Saving Audit Trail for documentation puts you at risk
during audit and regulatory review.
Later

Leverage your institution’s data and modeling

governance frameworks

!
Key Areas Establish a program governance structure that
o Data Development demands rigor and evidence
o Modeling Rationale Conduct 2nd and 3rd line reviews of the CECL
o Disclosures program
 Pitfall #2 Auditors and regulators will want to see
Lack of ownership your evidence for a “reasonable and
supportable” forecast period based on
over estimates your institution’s own informed,
thought-out view of the future.

!
Don’t rely too heavily on outside expertise
Be able to provide solid evidence to regulators
Think independently and trust your analysis
 Pitfall #3
!
Begin the “build vs. buy” decision process now
Underinvestment in If you build it, test, test, and test again
Analytics
If you buy it, know the full cost of ownership

Waiting until late in the CECL

implementation process to
tackle analytics and reporting
introduces the risk of not
having the tools you need
when you need them.
 Pitfall#4 CECL must involve most functions of
Failure to Integrate your institution: finance, accounting,
Across Business credit, risk, IT, data, treasury, audit, and
Functions front-line business units.

Organizations that can devote

!
sufficient resources will have
the best chance to achieve top
performance with CECL
implementation.
Successful integration will require leaders with:
-experience with integrative thinking and planning
-time to think cross-functionally and help keep
risks in check
 Four Guidelines to Follow

1 2 3 4
Create a Take ownership of Begin building Build an integrated
comprehensive your estimates your analytics CECL program
audit trail and reporting team
Questions?

17
Who We Are
FI Consulting helps clients drive business
results through data, analytics, modeling, and
technology. We aim to provide our clients with
practical, effective, and timely solutions and an
exceptional service experience.
Our professionals bring in-depth knowledge
and perspectives from an array of academic,
commercial, and government backgrounds.
They have advanced degrees and certifications
in fields that include finance, risk management,
computer science, and economics.

BETTER INFORMATION 60+ 68%

EMPLOYEES ADVANCED DEGREES

BETTER CONTROL BETTER

RESULTS
BETTER DECISIONS

BETTER PERFORMANCE 80 95%

AV E R AG E T R A I N I N G YEAR-OVER-YEAR
H O U R S P E R C O N S U LTA N T R E P E AT C U S TO M E R S
PER YEAR

©2018 FI Consulting. All rights reserved. 18

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