ABA Banking Journal - September/October 2017 - 41
CECL won't just change how data storage and analysis are handled. Credit
decisions and risk management will also evolve under CECL.
may be called out for review. "Going forward, the lesson
learned is that really you need to pay special attention to
data, and also the quality of the data," Yang says.
Other operational areas also likely
to feel CECL's effects
CECL won't just change how data storage and analysis are
handled. Credit decisions and risk management will also
evolve under CECL. On the surface, Rives says he expects
credit will slow, but he's quick to add that he actually sees
CECL's implementation as a good time to regroup. "I think
it's going to make the credit function smarter," he says.
"When banks are getting better information and refining it,
they'll be able to price their loans better." Price will become
more closely aligned with risk, something Rives says doesn't
necessarily happen now. "CECL will help banks better price
their products," he explains. Rather than pricing schemes
based on factors such as what a bank's competitors are
doing, Rives says the institution's own cost of funds would
be a better measure. "You don't want the last financial crisis
where you're over-lending," he says.
Other considerations are also going to come into the picture
once banks have reliable access to data that is more
granular and robust. Better historical comparisons can be
made, more accurate long-term outlooks developed-and a
number of operational areas are likely to benefit as a result.
"It could be 'What kind of money did we leave on the table?
Or what price are we giving up based on the deals we're
getting?'" Gullette says.
Although calculations may be at the heart of bankers'
focus as they gear up for CECL compliance, Gullette says,
"It's really a larger picture about managing the company."
Capital management, risk and credit decisions-even
programs such as incentive compensation-could soon
be feeling CECL's impacts. Bankers must be ready to
communicate the upcoming changes, not just to a board
that may not be familiar with the nuances of how portfolio
risk is analyzed, but also to consumers and employees
who need to understand loan pricing determinations and
incentive package structures.
Implementation and timeline concerns
The looming implementation timeline may create
some near-term data management challenges for
banks. Ensuring the availability of credible models and
predictions is one, which is closely linked to another-
infrastructure. "In the old days, banks could do it with
Excel," Yang says. "Going forward, they'll need something
more sophisticated." The governance process will also
need to evolve. "You'll need to have economic forecasts,"
Yang explains. Unless the bank has a department to cover
that function, outside vendor partnerships may need to be
cemented soon to help fill that role.
With what Gullette describes as a potentially "large
contingency of community banks" surmising that the
Financial Accounting Standards Board may withdraw or
amend the standard, he worries some organizations aren't
preparing for CECL as thoroughly or as promptly as they
should be. "The main thing is to start collecting data,"
he urges. In-house systems can get the process rolling
but future upgrades should already be on the radar. "The
problem is that bankers say, 'It's non-complex, I can do
it on a spreadsheet,'" Gullette says. It's a sentiment that
worries him. "Just because it's non-complex doesn't mean
there isn't a lot more processing needed to manage it."
Unless institutions begin the transition toward systems
capable of higher-level analysis, providing CECL-compliant
documentation could quickly become problematic.
Another challenge hindering progress is difficulty
getting the right people together to address the
issues. "Someone from the CIO group, or even a CIO's
equivalent or divisional sub-CIO, have to be part of the
stakeholder group for an enterprise-wide approach to
CECL implementation," Rives says. Identifying areas that
require improvement should be one of the team's top
priorities, along with developing a longer-term strategy
for compliance. "At least identify and map out what
your systems are and where you need to get information
from on a recurring basis," Rives says. He stresses that
it will be a dynamic, ongoing process. "It will have to
happen every quarter, it's not a one-time spend. You'll be
constantly tweaking this."
JULIE KNUDSON is a freelance financial writer and frequent contributor to
the ABA Banking Journal.
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