Tom Caragher, Senior Product Manager, Financial Risk Management Solutions at Fiserv shared his insight into CECL implementation ahead of the CECL Congress in NYC on October 11-12.
Tom, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?
I’ve been in finance and risk for several years. Specifically asset/liability management, funds transfer pricing and credit for the past 20 years. Prior to that I was in back office operations and the Chicago Board of Trade and Chicago Mercantile Exchange. Currently I’m focused on CECL and leading a team building software to meet the FASB mandate.
What are the key considerations when capturing ideas and concepts to help meet the coming pronouncement dates?
Know what data you need and understand that data.
What are the potential impacts if financial institutions do not properly understand the nuances of the CECL pronouncement?
The biggest potential impact will be to capital and earnings if losses are overstated. Understating the losses will lead to increased auditor and regulatory scrutiny but that is manageable. Having good historical data will help prevent both scenarios and help protect capital levels. Also, ideally, good data will give a better understanding of what qualitative adjustments to make.
Can you provide an overview of how to learn where financial institutions are aligned or in disagreement?
The auditors will be the first resource for those questions. They should be gathering that feedback and input from a lot of institutions. However, one should be sure they are being objective. A second will be the risk software providers. They are increasingly receiving questions about solutions and thought processes. Another resources will be associations and networks, webinars and core data providers.
Finally, what challenges do you foresee with CECL implementation over the coming years and how can institutions best plan to meet deadlines?
There are a couple of challenges that can be seen immediately. First goes back to the data. Many if not most institutions do not have adequate historical data. Identifying the data and creating a plan to acquire and manage it is critical. It will be a daunting prospect for those who have not started already. The second potential challenge is that no one really knows how losses will manifest in the future. It will take years to gather enough history to cover multiple economic cycles for the data to truly meaningful. Until then, it’s a guess and its likely most could be wrong.