I recently completed a CECL Roundtable road trip which included stops in Oklahoma City, Little Rock, and Plano. It’s been one of the highlights of my time at Visible Equity since joining the team in January. I love a good road trip. Hitting the open road, visiting new places, and talking about CECL—it doesn’t get any better than that!
In case you don’t know what a CECL Roundtable is, we’re doing a lot of them lately. We’ve already completed 38 Roundtables in different cities across the country and have plans to do a total of 65 by the end of the year. Roundtables are free, include lunch, and are hosted by local financial institutions. These events are educational and informative with discussion topics covering all things CECL, including updates on the latest regulatory guidance, implementation steps, institutional impact, and other insights to help you become CECL-ready.
The best part of these discussions is the chance to network with and learn from other financial institutions about their CECL journey. The three Roundtables I attended were very insightful as we covered a range of CECL related topics that resulted in substantive discussion and shared experiences from the institutions that attended. I’ve chosen to summarize three of the main takeaways in hopes that they will be helpful in your CECL implementation efforts.
Am I on track with my CECL preparations?
This is a common concern shared by nearly every institution we met at our Roundtable discussions. Everyone wants to know if they’re making adequate progress toward CECL implementation. As we noted in a recent survey, most institutions are making fairly good progress—they’ve formed a CECL committee and are moving forward with an implementation plan. Some are also starting to test CECL methodologies.
A key indicator of whether or not your institution is on track with its CECL preparation comes down to data-readiness. A critical component of any institution’s implementation plan should be ensuring that it has sufficient historical data to test certain CECL loss methods. Many institutions still have substantial work to do to get their data ready. Indeed, this is one of the biggest hurdles an institution must overcome early on in the implementation process. If you haven’t already started getting your data ready, we strongly recommend that you begin doing so now.
Which CECL methodology should I choose?
This is one of the hottest topics we cover during our CECL Roundtables. Institutions want to know which loss method to use to collectively review loans and other assets evaluated at amortized cost. Static Pool, Vintage, Roll Rate, Loss Migration, Weighted Average Remaining Maturity (WARM), Probability of Default, and Discounted Cash Flow have been referenced as potential methods, but there’s a lot more to this process than just picking a method that gives you the most favorable allowance amount. In fact, it’s important to note that there’s not one “true” allowance amount. There are potentially many possible reserve amounts that may be acceptable within the parameters of the ASU. This will ultimately be based on a variety of factors related to your portfolio, including which CECL methodology you choose.
In the Roundtables I attended, we reviewed each of the most commonly used methods and discussed three factors to consider when making a decision: feasibility, performance, and management judgment. Our CECL Methodology Selection Guide provides a more detailed overview of how to apply these factors when considering the various methodologies. The key is to find the most reasonable reserve amount within a relevant range that management can adequately justify. Management should carefully consider the pros and cons of each method, their assumptions and limitations for use, and the sustainability of using a particular method.
What will be CECL’s impact to my organization?
In all of our CECL Roundtable discussions, we observed one thing that nearly every institution shares in common: a certain degree of uncertainty regarding CECL’s overall impact to their organization. Banks and credit unions recognize that CECL is one of the biggest accounting changes in decades and they know it will impact them, but it's more difficult to say exactly what that impact will be and its implications across their organization.
Generally speaking, each institution will need to evaluate and assess CECL’s potential impact in the following areas: capital requirements, lending strategy, and portfolio management. There will be an impact to each institution’s reserve amount. The majority of folks we talked to said that they anticipate it will increase their reserve amount by at least 25-50 percent, if not more. Significant changes to reserve amounts will likely impact capital requirements, but beyond the more obvious accounting effect, there still remains some uncertainty.
A few institutions indicated that they anticipate CECL may cause them to reconsider their lending policies. For example, one institution said that they expect it will impact their indirect lending strategy. Others questioned how it will impact credit risk with the possibility that they might end up not being able to lend to certain customers anymore. Another institution asked, “If CECL has a major effect on our lending strategy, who will serve the underserved?”
These are big questions that will ultimately be answered as CECL becomes a reality for all institutions. In the meantime, there’s a lot that you can do to ensure that you’re on track with your implementation plan. The sooner you have fully implemented CECL, the sooner you can evaluate and assess its impact to your organization.
I thoroughly enjoyed my recent CECL Roundtable road trip and learned a lot from the discussions we had with the many institutions who attended and shared insights from their CECL journey. If you haven’t already had the opportunity to participate in one, check out our schedule and see if there’s one coming to a city near you.