By Stevan Maglic, SVP, Head of Quantitative Risk Analytics, Regions Bank.
Stevan, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?
I’ve got over 20 years of experience as a practitioner in risk management and line-of-business functions at Merrill Lynch, BMO, ABN AMRO, and most recently at Regions Bank. I have worked extensively developing and implementing economic capital and other credit-related models. I have also worked in the credit portfolio management space, developing and implementing credit trading and risk mitigation strategies. Since the financial crisis, I have focused on developing champion/challenger stress testing methodologies, but more recently my focus has shifted to CECL and the integration with stress testing, economic capital, risk rating, valuation and other methodologies across the firm into a comprehensive framework. Over the course of my career, I have spent considerable amount of time in front of regulators, model validation, audit, and internal stakeholders, defending methodologies and methodological choices.
At the CECL Congress 2018, you will be speaking on your insight regarding, ‘Implementing a comprehensive analytical architecture to provide a holistic view of the business’. Why is this a key talking point in the industry right now?
Great question. This is about making good short term tactical decisions right now (i.e., to implement CECL), but also about addressing longer term strategic issues to ensure efficiency in the future. Since this can’t all happen overnight, I think the trick right now – as far as CECL is concerned – is to be clever in terms of leveraging existing infrastructure to the extent possible without creating the need for more people, models, and more processes. CCAR banks can make effective use of their stress testing models, while less sophisticated banks can implement effective simpler models to get the job done. Similarly, firms should try to use existing data and staff if possible. Having said all this, it is also important to have a pretty clear picture of what the end state will look like and how everything needs to come together. With a clear end-state in mind, it becomes much more clear what strategic decisions and changes need to be made today.
What are the key considerations that need to be made when allowing lines of business access to results to make business decisions?
That’s easy! The key consideration is that the results have to be right. Yes, the response is partly sarcastic, but you really do need to make sure you do a good job from the business perspective. An obvious CECL example is abruptly reverting to historical averages after the reasonable and supportable period. FASB allows this, but the line of business won’t be happy when the CECL reserve goes up unrealistically for a loan with a slightly longer maturity. Additionally, in order to be credible, the analysis needs to be performed at a sufficient level of granularity to significantly differentiate risks. For this reason — and a few other reasons — working at the loan level is worth the added trouble. Finally, if you want to maintain credibility, make sure you are really comfortable with the results before you share the numbers. Also, since interpretation of the CECL standard may evolve, be sure to be transparent regarding the sensitivities to inputs since they are subject to change (e.g., how are losses dependent on reasonable and supportable assumptions).
Why is it an important to align with analytical processes and activities?
It is really about efficiency. A model or process that can be used for multiple purposes is less costly in every sense. Additional datasets and models means more work, more reconciliation, and more things that can go wrong. It is easier to understand, explain, and you are more likely to know what you are doing if you can keep things aligned and simple. Finally, when processes are linked, as an example, learnings from CECL development are seamlessly transferred back to the CCAR process.
Can you provide a brief overview of the essential things to remember when building a complete comprehensive platform?
This one is challenging. What you need is a pretty clear vision of what you ‘re doing and how it all needs to look when you are done. Unfortunately, there is no real substitute for experience here. It really helps if you have a deep understanding of the individual pieces that you are pulling together. All is not lost however, because there are a variety of vendor solutions that can help get you there. But it does come down to knowing what vendor solution is right for you.
Finally, what challenges do you foresee with CECL implementation over the coming years?
Implementation of CECL is expected to be quite an involved process in a number of ways, so the recommendation comes from Project Management 101: avoid deadlines that involve complicated steps with contingencies. As an example, although discounted cash flows reduce reserves, most firms are not attempting implement this right away. Indeed, discounting introduces a significant level of complexity that can be implemented as part of a future enhancement. Similarly, focus on the “must haves” and save the “nice to haves” for later.