CECL implementation for FBOs: Leveraging IFRS 9 for CECL

By Kuo-Chang Lu, Head of Strategic Planning and Business Engagement, RBC

What, for you, are the benefits of attending a conference like the ‘CECL Forum’ and what can attendees expect to learn from your session?

With CECL going live in 2020, I think this is a good time to discuss and share insights on CECL implementation, expected results and key concerns. CECL is a principles based guidance and as a result, there will be differences in how we interpret and implement the guidance and support our product strategies in a meaningful manner.

I think it is important to see CECL not just as an accounting and reporting tool but also as a vehicle to help align various groups to better support our businesses. One of the lessons learned for us, is that it takes effort to get everyone on board with modelling estimates that impact our credit loss reserve and business line results. This helps drive strategic conversations around product profitability and pricing strategies. The inclusion of multiple stakeholders and getting their buy-in is very important in not only implementing CECL but also in using it as a tool to understand and drive business results.

What are some of the key hurdles for FBOs implementing CECL and the opportunities to leverage IFRS 9?

We are leveraging IFRS 9 for our CECL implementation given the overlap in requirements and population scope. One thing to note is that our US loans and leases book is relatively small compared to our Canadian portfolio. As result, there are areas which we need to enhance that previously was deemed immaterial or out-of-scope. Besides modelling capabilities, we will also leverage IFRS 9’s governance and control framework for CECL. Under this approach, we will have a more holistic process between IFRS9 and CECL while minimizing potential gaps and redundancies. But additional work is needed to ensure IFRS 9’s control and data sourcing process is applicable for the CECL framework.

In addition, besides IFRS 9 and CECL, we also need to consider CCAR and Stress testing requirements given the parallels and interdependencies.

Lastly, it is important that businesses, risk, finance and accounting teams understand and agree with the ECL results in order for us to implement CECL in a meaningful manner.

What are the key considerations for institutions Leveraging IFRS 9 to a CECL framework?

We can leverage IFRS 9 for CECL framework but there are definitely items that require additional consideration. For example:

Governance and review framework – who reviews and ensure results are consistent given similar but different requirements
Quantitative vs. qualitative adjustments – what is the appropriate level and who reviews and approves ECL results
Scenario and scenario expansions from International to US regional level
Different sensitivity and analytical reports are needed to support businesses and entities

In addition, we have to balance all this with a view on the various regional and functional stakeholders and how this flows into the budgeting and planning framework. For me, it is not just about implementation, it is also about the impacts to our businesses, functions and roles and responsibilities.

Can you provide our readers with an overview of the decisions on scenario design for transition matrix?

We have a scenario design and expansion team that takes global macro-economic variables and expand it to US regional levels. We partner with them and also with risk and credit teams to ensure the transitional matrix aligns with different economic assumptions and is appropriate through the life of the instrument.

How do you believe the implementation of CECL will impact the industry over the next 12 months?

CECL standards are principles based, and as such there will be natural differences between firms besides the forecasting aspect. I think there have been a healthy amount of discussion amongst firms in terms of CECL impact and firms have provided high level guidance on ECL ranges. We understand that this is the beginning of a process that will continue to evolve as analysts, firms and FASB analyse the impacts of CECL. I think there will be difficulties in comparing results across firms without the proper disclosures and understanding of assumptions that goes into the ECL calculation.

I think we will also need to start connecting the dots a little better between various functions and how we can truly partner and support businesses in more meaningful manner. This is a good opportunity to align risk and finance functions to further support business needs.

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