By Chip Messick, Managing Director, Argus Information & Advisory Services.
Ahead of the CECL 2017 Congress, Chip shares his insight regarding the CECL end vision and it’s importance ahead of implementation.
Chip, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?
I have been in financial services management for over 20 years with extensive experience in of all aspects of consumer lending and P&L management. Currently I am am Managing Director with Argus’ Risk and Regulatory Practice working with our client partners delivering solutions for strategic planning, financial and regulatory submissions and industry benchmarking. Before joining Argus, I was Vice Chairman MBNA/Bank of America with responsibilities including credit risk management, underwriting, and pricing strategies. I also served on the board of directors and asset and liability committee for Herald Bank (NYSE: HNB).
At the CECL Conference 2017, you will be speaking on your insight regarding, ‘developing a gap analysis for CECL to develop an implementation roadmap’. Why this is a key talking point in the industry right now?
The CECL implementation date may seem a long way off for most firms but financial institutions will need time to prepare. It is important to understand what changes to the current process are required to ensure firms meet that deadline without undue stress and have time to run the new CECL standard in parallel to existing processes. Now is the time to identify key stakeholders in the process to complete a gap assessment. Ensuring enough time to develop a project plan to implement the changes required and fully understand their impact on loss forecasting methodologies, data, systems and controls. It also may be necessary to explore changes to product design, pricing and collections practices all which require thorough planning prior to implementation.
Why is it an important step in implementation to review the institutions model selection?
The new CECL requirements do not provide detailed guidance on how to develop and implement an estimate of expected life time loss. The selection of a modeling methodology is a key decision in the move to CECL. Given the range of possible methodologies, it will be critical to evidence a firms rationale in choosing a method as well which alternatives were considered and why they were rejected. This will provide a record to help address questions from regulators and the audit process.
Can you provide a brief overview of the CECL requirements for data management and modeling?
Regulators will expect institutions to utilize reasonably available historical data. Having historical loan-level data sourced from the system of record for as far as back possible will give firms the ability to test multiple approaches to CECL and the impact on reserves. Having loan level performance history that captures at least one economic cycle (10yrs) is ideal. In the case of thin historical data, an alternative is to use a similar cohort of historical industry data to supplement and/or complete the historical data sets to develop accurate loss estimation models.
Finally, what challenges do you foresee with CECL implementation over the coming years and how can institutions best plan to meet deadlines?
The goal will be to create a sustainable CECL process that supports the organizations key stakeholders. CECL implementation will impact many parts of the organizations data management, modeling, risk, control and accounting processes. While there will be many challenges to CECL implementation, getting the stakeholders involved now to understand the new requirements and which processes will need to be modified, replaced or developed will ensure a successful transition.