By Preparing for 2019 parallel runs and producing results for review ahead of finalization
Could you please tell our readers a little bit about yourself, your experience and what your current professional focus is?
In my current role as an Advisory Industry Consultant at SAS, I provide strategic insights, best practices and domain expertise in the areas of credit, market and regulatory risk management to senior leaders at financial institutions of varying sizes and complexities.
My Risk background has a heavy emphasis on the strategic design and implementation of large-scale risk initiatives, including Basel, CCAR, CECL and IFRS 9. As the Director of Credit Methodology at GE Capital, I led the development of modelling methodologies across a $150 billion multi-asset portfolio. As the global model documentation lead, I achieved firmwide standardization and compliance with the OCC’s SR 11-7 guidance on model risk management.
Previously, I served as the Head of Commercial Transaction Structuring and Analytics for PSE&G’s award-winning renewable energy loan program. I led the underwriting and escalations functions for North America at OnDeck Capital, the largest online lender in the US and was part of an elite risk team that executed the historic merger of the New York Stock Exchange with ICE in 2014.
Prior to my career in risk, I was one of the first and youngest female traders working in the emerging markets and later, an equity derivatives trader and hedge strategist on Wall Street. I also served as a CDO Structurer for BNP Paribas, the second largest bank in Europe.
What, for you, are the benefits of attending a conference like the CECL Congress and what can attendees expect to learn from your session?
Focused conferences like the CECL Congress not only expose participants to experts, innovators, practitioners and industry leaders, but also to colleagues from peer institutions engaged in solving similar problems. The knowledge and insights gained through sessions and networking opportunities can lead to breakthroughs. Participants bring these perspectives back to their organizations and share them with their colleagues and business leaders.
My session delivers a unique perspective on parallel runs, informed by SAS’ 50+ worldwide IFRS 9 implementations. In my experience, many well-intentioned project teams with precise timelines were unable to meet their own goal of four full quarters of parallel run, due to improper planning, inflexible technology and inadequate resourcing upfront. I will be discussing how to conquer the parallel run by dividing it into multiple phases and focusing on the critical elements.
In your opinion, what are some of the best practices FIs can undertake for successful CECL implementation?
A successful CECL implementation requires an organization to know its “starting” point and its end goal (e.g. level of complexity, etc.). A gap assessment will determine how much work needs to be done for the organization to transition from the current incurred loss approach to the expected loss approach. Clear objectives set in the beginning will determine the type of data needed; the preferred methodologies and subsequently, models; project staffing and the level of investment in systems and technology.
Specific best practices have emerged, including a single source of truth e.g. a data warehouse; a combination of in-house and vended models across multiple portfolios; cross-functional collaboration; and enhanced governance within the end-to-end process. To meet the tight timelines that organizations face during the production process, a shift from Excel-based to a platform-based, process-driven technology has become common.
What are the current challenges and opportunities Financial Institutions face in regards to parallel runs and producing results for review ahead of finalization?
During the parallel run, resources are expected to be stretched because production under the incurred loss approach must be maintained for financial reporting purposes, while procedures for expected loss need to be learned. Therefore, FIs with efficient, production-ready, automated processes will be at an advantage over those with manual processes.
CECL requires loss forecasts to be extended over the lifetime of the exposure, and the method and timing of transitioning to a long-term loss rate can materially impact the results. Analyzing the potential consequences of such decisions on financial statements may be challenging. However, even more challenging, will be the ability to effectively test and assess multiple alternatives over time, prior to the effective date.
FIs should use this as an opportunity to refine processes, strengthen governance structures, craft succinct messages for all stakeholders and promote deep cross-functional collaboration.
Could you provide a brief insight on leveraging lessons learnt from limited runs for IFRS 9?
Regardless of how in-depth or limited the parallel run is expected to be, engaging executive management early on and having their buy-in of the parallel run roadmap is key.
Limited parallel runs should encompass at least two quarters of orchestration of the end-to-end process. Although it may add complexity and not identify all issues, running only certain material portfolios through the process may be an approach to consider, if time is of the essence.
Resource planning and technology, which consists of a modular architecture, workflow automation and powerful processing capabilities, will allow FIs to focus their limited time and resources on the outcomes. This will give them the opportunity to experiment with alternative models, calibrations and assumptions and spend time understanding, documenting and explaining their consequences, and lead to a sound and sustainable process.
How do you see CECL impacting the financial risk landscape over the next 6-12 months?
In the near term (next 6-12 months) we will see a lot of rationalization between the risk and finance teams on data, modelling methodologies and results. As the orchestration process is industrialized, we will see deep cross-functional collaboration and active engagement from executive management. In an abundance of caution, and due to a lack of comparability among peers, FIs may run multiple iterations, swap methodologies and pivot from original plans, as they come closer to the effective date.