By Shlomo Cohen, Senior Advisor, AxiomSL
Could you please tell our readers a little bit about yourself, your experience and what your current professional focus is?
After MIT, I started my career as a software engineer selling financial planning tools to banks. These tools were good for automating calculations and reporting, but they could not replace bankers for answering tough questions such as how to measure the performance of businesses? How to organize capital allocation? To measure risks? Etc. They were looking for help. So I set up a consulting firm to help banks define and implement effective management tools, and ultimately increase their shareholder’s value. After 12 years of consulting, one of my customers wanted me inside full time and I helped his bank for another 10 years to articulate risk and finance, set up pricing and performance measurement tools along with risk appetite and strategic planning. At some point, I found out that technology what the major bottleneck to these ambitions, so I found it natural to team with and join AxiomSL, a world leader in data management technology. At AxiomSL’s, we focus on combining our deep industry expertise with our innovative technology to deliver successfully the most critical regulatory, risk and data management solutions.
What, for you, are the benefits of attending a conference like the CECL Congress and what can attendees expect to learn from your session?
Succeeding in meeting today’s challenges – such as CECL implementation – requires external information, brainpower and proper tools. The CECL congress contributes to providing me with high quality information through lectures on selected hot topics, networking, and the availability of experts on new tools and technology.
Regarding my session, attendees can expect to learn what are the technological challenges raised by the new accounting standard and how to build-up a proper solution. Once a back-stage issue, technology is now the rising star at the expense of modelling for instance, because fulfilling ambitions such as CECL renders the current typical architecture for banking analytics obsolete. I will explain why and introduce attendees to state-of-the-art technology, the one needed to successfully implement CECL.
What are the key challenges and opportunities financial institutions face when working out the right IT infrastructure?
There are three main challenges: speed, reliability and transparency. And CECL is bringing these requirements to another level.
Speed: The expected massive increase of data granularity will reduce the speed of calculations at the precise moment where a push towards real time is expected.
Reliability: Because current IT architectures use a lot of Extract-Transform-Load (ETL) processes to compute the many indicators in the desired format, they also generate redundancy and discrepancies, serious threats to the legitimate expectation of results reliability.
Transparency: Stakeholders and auditors have heightened expectations regarding the clarity and accountability of disclosures because of the increasing availability of powerful technological tools that automatically record all changes and facilitate analytics.
Banks implementing CECL with the right IT infrastructure will be up to these challenges and will offer red-carpet opportunities to themselves: Thanks to more granular results, higher reliability, quicker delivery and more powerful analytics, banks will be able to enhance their assessment of credit risk, their pricing, their performance measurement. They will come up with more competitive products, better management decisions and ultimately will create value for their shareholders.
Do you have any tips for financial institutions when answering to auditors with regards to CECL implementation?
Today everyone can assess in a click alternative roads from A to B, travel times and distances. Similarly, auditors legitimately expect banks implementing CECL to be able to identify on the spot where does a given data comes from, what source data it is made of, who created it and when, and in what reports it is used. These functions are called data mining, data lineage and data tracing. So, when selecting a tool to implement your CECL, make sure these functions exist in a native mode, or else both your auditors and yourself must get ready for some unhappy times.
In regards to technology, how can financial institutions ensure successful CECL implementation?
Financial institutions should make sure that the technology they selected for their CECL solution is state-of-the-art, meaning quick implementation, reduced global cost of ownership and flexible maintenance.
Key features of a state-of-the-art technology include: 1. Single source analytics allowing data ownership feel across many users, 2. Intelligent connected reporting incorporating top to bottom data mining and advanced analytics, 3. Adapts to the Client processes, not the reverse, meaning not a fixed data model, 4. Able to withstand expectations in terms of data volume, speed and analytics and finally 5. Flexible platform, able to support and accompany on going iterative changes like better models, change of portfolio structure, etc.
Good news: If your current solution today looks more like a patchwork of excel spread sheets with little of the above attributes, it is still time to plan for your IT upgrade, as the above technology can be implemented both quickly and step-by-step, not like the old-time big bang approach. Adopt, engage, deploy.
How do you see CECL impacting the financial risk landscape over the next 6-12 months?
In the next 6-12 months, CECL is likely to impact the mental representation of many bankers regarding credit risk. Despite banks having the crucial role to allocate almost 30% of all US savings and deposits to the economy, they still have rudimentary ways to assess credit risk. CECL is bringing in a refreshing approach, with credit risk now to be assessed until the maturity of the transactions, not just one year ahead; and estimating expected credit losses must also include a forward-looking view of the economy. Both these features, obviously key components of a sound credit risk assessment were, surprisingly, absent from banks and regulators concerns, until the accountants came up with it.
In the longer term, a better credit risk assessment by banks will lead to a more discriminating pricing and a more efficient credit market, fertile ingredients to renew the ability of banks to service the economy properly.