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Crossing Over to a New Accounting Standard

Tech Sights BHThe latest report from Moody’s Analytics summarizes the findings from a survey that examines the measures that U.S. banks are taking to convert to the Current Expected Credit Loss (CECL) model, which was instituted in June of last year. The results of the survey displayed a number of trends, including examination of data, contingency planning, and how the size of banks will foresee challenges when converting to CECL in the future.
The quality versus quantity debate was one of the main focuses of the report, as banks are expected to see numerous challenges data quality and quantity as well as life-of-loan loss models. According to the report, banks will need to divulge origination and loan information, loss given default information, revolving loans or lines of credit, ongoing changes to credit risk status, portfolio information, and economic data in order to comply with CECL. The report also stated that banks will see fewer challenges surrounding software, calculations, and reporting.
The survey found an overwhelming response of banks seeing challenges in modeling needs. Forward-looking CECL estimates; assumptions, data, statistical, and mathematical methods; materiality; and appropriateness of parameter quantification were listed as four aspects that can be used when developing models for CECL.
With more than half of the banks already in early stages of preparation for CECL, Moody’s Analytics also foresees smaller banks going through more challenges than larger banks along with increased provisions. Some of the banks feel as though the CECL standard has gotten too complex. One CCAR bank stated that “The CECL standard has gone too far, and current practices, which must now be changed, could have incorporated future events more simply.”
Others feel as though CECL is not necessary for smaller financial institutions. A private community bank revealed that because of its smaller size, smaller banks “should have a good handle on their customers and risk levels as a rural/ community bank,” according to the survey.
Anna Krayn, Senior Director at Moody’s Analytics, explained that although CECL isn’t favored among banks, it will ultimately change the way financial institutions protect their assets. “The implementation of CECL poses a range of process and methodological challenges for banks,” she said. “It requires an interdisciplinary approach that leverages expertise from credit risk, accounting, treasury, finance and technology teams. Given the potential impact of CECL on earnings and capital, firms must understand the changes required to transition to the new standard and put implementation plans in place ahead of the launch date.”
results of the survey displayed a number of trends, including examination of data, contingency planning, and how the size of banks will foresee challenges when converting to CECL in the future.
The quality versus quantity debate was one of the main focuses of the report, as banks are expected to see numerous challenges data quality and quantity as well as life-of-loan loss models. According to the report, banks will need to divulge origination and loan information, loss given default information, revolving loans or lines of credit, ongoing changes to credit risk status, portfolio information, and economic data in order to comply with CECL. The report also stated that banks will see fewer challenges surrounding software, calculations, and reporting.
The survey found an overwhelming response of banks seeing challenges in modeling needs. Forward-looking CECL estimates; assumptions, data, statistical, and mathematical methods; materiality; and appropriateness of parameter quantification were listed as four aspects that can be used when developing models for CECL.
With more than half of the banks already in early stages of preparation for CECL, Moody’s Analytics also foresees smaller banks going through more challenges than larger banks along with increased provisions. Some of the banks feel as though the CECL standard has gotten too complex. One CCAR bank stated that “The CECL standard has gone too far, and current practices, which must now be changed, could have incorporated future events more simply.”
Others feel as though CECL is not necessary for smaller financial institutions. A private community bank revealed that because of its smaller size, smaller banks “should have a good handle on their customers and risk levels as a rural/ community bank,” according to the survey.
Anna Krayn, Senior Director at Moody’s Analytics, explained that although CECL isn’t favored among banks, it will ultimately change the way financial institutions protect their assets. “The implementation of CECL poses a range of process and methodological challenges for banks,” she said. “It requires an interdisciplinary approach that leverages expertise from credit risk, accounting, treasury, finance and technology teams. Given the potential impact of CECL on earnings and capital, firms must understand the changes required to transition to the new standard and put implementation plans in place ahead of the launch date.”

About Author: Mirasha Brown

Mirasha Brown is a graduate of Florida A&M University and is pursuing a masters degree at Syracuse University. Born and raised in Florida, she has contributed to public relations and marketing campaigns for Rent The Runway and Billboard. She is a communications specialist with The Five Star and a contributing writer to DS News and the MReport.
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