How would CECL have performed during the great recession?

How would CECL have performed during the great recession?

Ahead of the CECL Congress 2017, Michael Fadil, EVP, CECL Program Executive Sponsor at Citizens Bank shares his insight on CECL quantitative impact analysis. 
Michael, can you please tell the Risk Insights’ readers about yourself and your professional experiences?

I have a varied career across a few different areas in the financial services industry. I started my professional career at Chubb Securities in Concord NH, while I was continuing to run competitively both nationally and internationally, but realized that I really needed to get back to Hanover, NH and train more regularly with my coach and the Dartmouth College team. After giving competitive running a try, after the 1988 Olympic Trials I really started my career at Fleet Bank in Providence RI, starting in the Commercial Credit Training Program but also managing a group of trainees, then working in a Credit Review function before really finding my stride in Credit Analytics, in the early 1990s when things were still pretty rudimentary, where I spent a lot of time working with our M&A Group (which, by the way, Brian Moynihan ran before eventually becoming CEO of Bank of America) on acquisition due diligence exercises. The Credit Analytics work led to getting more formally involved in overseeing Economic Capital and Credit Risk Parameter (PD, LGD) modelling. When Fleet was acquired by Bank of America I left banking for a short period to work for an Investment Advisory Firm in Providence (something that I later drifted back to for a short while again in 2013). But a former boss of mine from Fleet ended up as CRO at SunTrust and asked me to come to Atlanta and oversee his Credit Risk Analytics team, which I did from 2006 – 2012. After that I spent about 18 months in Business Development for Moody’s Analytics focusing on helping their clients tackle CCAR challenges, while at the same time I was working part time for a small Investment Advisory firm. When the opportunity at Citizens to run our Risk Architecture Team came up in 2013 I was able to join the bank just as they were separating from Royal Bank of Scotland, which was a fantastic opportunity and experience, while at the same time allowing me and my family to get back to New England. Then, when the CECL Accounting Standard was finalized in June 2016, the CRO here saw the need to have someone fully dedicated to overseeing the program, which again, has been a terrific and rewarding opportunity.

At the CECL 2017 you will be focusing on how CECL would have performed during the great recession. Why is this a key talking point at the Summit?

This is an incredibly important issue. When the Bank for International Settlements (BIS) was working on instituting Basel II, there were 4 or 5 Quantitative Impact Studies involving all of the larger banks here in the US to see how Basel II would work and what the impact would be. There was no such effort with CECL. The focus for CECL, not surprisingly, has been the ability to accurately model and forecast losses. As it turns out, the single most important factor that will impact the amount of CECL reserves is a bank’s decision on how long it will forecast for the reasonable and supportable horizon. The impact analysis I will present uses publicly available data from the Citizens Bank peer group to show CECL from 2005 – 2016, using different assumptions, all which will be allowable by GAAP.

Without giving too much away, can you give us a brief insight into how CECL would have performed during the great recession?

The short answer is, “it depends.” As mentioned above, the CECL reserve will be very sensitive to a few key assumptions. All else equal, if a bank’s economic and loss forecasts are good, a longer reasonable and supportable time horizon will give higher reserves in a downturn and lower reserves in good times leading to more trough to peak reserve volatility, so banks really need to be prepared to understand that and if it feels that it can forecast losses over a longer reasonable and supportable forecast horizon, it will have to adopt to that challenge. Also, the analysis shows, not surprisingly, how important the maturity profile will be – all else equal, longer tenor will attract higher reserves. If banks choose to think about this as they manage product mix and product terms with regard to maximizing earnings this could lead to unintended consequences that could negatively impact the real economy.

How do you see the role of the risk management professional within the CECL department changing over the next 6-12 months?

CECL will continue the trend that we’ve seen over the past decade of banks having to look at their functions in a more integrated manner. To adequately tackle all of the challenges with a successful CECL implementation Credit Risk, Model Development, Finance, Accounting, Treasury, Capital Management, the Lines of Business, Technology, Data, and Loan Operations to work in conjunction because decisions made to address one specific issue of CECL will often have impacts on other areas of the bank.


Michael will be speaking at the CECL Congress 2017, he will be sharing his insight on a historical analysis of 10 large regional banks and a look at how CECL reserve would have changed with different assumptions.