Western Banker - July/August 2016 - (Page 12)

Turning Compliance Overhead Into a Competitive Advantage By Garver Moore s institutions are preparing for the transition to the FASB's current expected credit loss (CECL) model, the accumulation of accessible, loan-level data is recognized as a key step for scenario building and credit risk planning. Even beyond compliance with an expected credit loss model, the availability and analysis of such data will help institutions in achieving their profitability targets. In addition to ensuring data archives include the proper loan-level detail for CECL calculations, an institution must also consider the quality of their data. The five key considerations when evaluating institution data quality are transparency, granularity, portfolio comprehensiveness, frequency and security. A robust and prudent expected credit loss calculation will touch multiple stakeholders within and outside the enterprise. Transparency is key to reduce the comprehension friction as these stakeholders from different backgrounds and with different responsibilities work with the calculation. Institutions should document their data sources and transformations in their data warehouse; a robust calculation should self-document not only the source but the reliability of each piece of information used to drive the model. The math, normalization, or inputs that drive downstream decisions should all be transparent and available. To responsibly predict an expected credit loss under CECL, more granular 12 www.wib.org Western Banker data is required. The specific minimum drivers of default and loss modeling will emerge as guidance is finalized and regulatory implementation evolves, but at the very least, institutions should plan for access to a time series of loan-level performance data. If not only for CECL, institutions should collect and model this data as a best practice in managing portfolio risk and translating institution risk appetite and profitability targets into business parameters. Institutions should ensure that data is stored and archived in a comprehensive manner, not simply in cases of loss or degradation. Performing loans will need to be included in any long term archive in order to make comparisons and regression meaningful. Many institutions have records of historical loan events, such as charge-offs, degradations, prepayments, and delinquencies. However, an organization has much more flexibility if the data is recorded as snapshots in time, creating a periodic and comprehensive record of every loan's state, from which historical events and frequency can be reconstructed. This affords organizations much more flexibility http://www.wib.org

Table of Contents for the Digital Edition of Western Banker - July/August 2016

A Message from the President & CEO
From Front-End Ratings to Ongoing Risk Analysis to Rating Migration
The Fifth Pillar: Continuing Expansion of KYC
Turning Compliance Overhead Into a Competitive Advantage
Getting Started With Third-Party Risk Management: Two Key Questions
Four Steps to Winning the Vendor Management Battle
Douglass M. Eberhardt, WIB Community Banker of the Year
Regulatory Hot Topics
Professional Development
Welcome New Members
Product and Services Directory
Index of Advertisers

Western Banker - July/August 2016

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