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US Current Expected Credit Losses (CECL) implementation insights 

Knowledge, dates and potential implications

For the banking industry, the FASB’s new CECL accounting standard is the most impactful accounting change in over a decade. We can help you prepare.

A collection of insights and dates to help you prepare for CECL’s impact

CECL promises to be one of the most significant accounting projects of the next five years. Right now, it may seem like there is plenty of time to comply with CECL. However, its significance and widespread impact demands banks take an early and disciplined approach to implementation.

As our recent survey of senior executives at 31 US banks reinforced, the new CECL standard will involve and drive changes across numerous facets of your bank’s operations including accounting/finance, IT, risk, the business units, and others. In addition to its major operational implications, CECL is expected to have an equally significant financial impact on impairment estimates, capital ratios, and the volatility of profit and loss.

Banks need to think strategically about CECL’s far-reaching implications and prepare for implementation as soon as possible, lest they fall behind on resource planning and critical deadlines. To help our banking clients get started, Deloitte is sharing its CECL knowledge and insights through a multipart collection of topical perspectives and companion webcasts.

Each of the pairings will address a key area of your business that CECL is likely to impact, with the goal of helping you form a more strategic and comprehensive view of your CECL challenges. From business impact, data management, and credit modeling to risk, governance, and technology, we’ll explore what’s at stake and what you can do to ready your organization for complying with CECL on time and with maximum effectiveness.

road ahead

CECL implementation dates

  • December 15, 2019: Public business entities that are SEC filers must adopt CECL guidelines for fiscal years beginning after December 15, 2019.
  • December 15, 2020: All other public business entities must adopt CECL guidelines for fiscal years beginning after December 15, 2020.

Early adoption is allowed for all entities starting with fiscal years beginning after December 15, 2018.

CECL messaging: What investors may ask CFOs

With year-end approaching, many institutions will be nearing the end of their CECL build phase. As institutions then turn toward their “parallel run” phase, investors’ focus on CECL will likely increase as well.

As the CECL dialogue between investors/sell-side analysts and individual institutions picks up, questions will likely focus on three areas: Strategic implications, methodology and measurement, and implementation status and communication plan.

  • What will CECL’s impact be on institutions’ current and future capital plans?
  • Will institutions exit or modify any products given the new CECL provision methodology?
  • Will investors be able to estimate institutions’ future credit provision under CECL for valuation purposes?
  • Will investors be able to bridge from institutions’ current allowance to their new CECL allowance?
  • What is the status of institutions’ implementation efforts?
  • Will institutions provide CECL approach/methodology information with adoption?

Getting the CECL disclosures right will be no easy task. Getting the right balance of qualitative and quantitative information to tell a complicated story about a highly judgmental estimate with significant impact on institutions’ market valuations will likely be the biggest disclosure challenge since communicating credit quality during the last recession. Developing a communication strategy will take an enormous investment of time, and institutions that begin this effort early will be better prepared at adoption.

Capital and the allowance for credit losses

Today’s different measurement approaches for banks’ allowance for credit losses creates a competitive disadvantage for US banks. This occurs because US accounting principles for measuring the allowance for credit losses result in higher amounts than their international peers. And such differences aren’t fully reflected in the regulatory capital rules.

This article takes a closer look at how the differences between a standardized approach (SA) and internal ratings based (IRB) approach could be causing this disadvantage for US banks. It also outlines two potential steps to help level the playing field:

  • For IRB: Delete the provisions pertaining to the capital floor deduction, replacing it with symmetrical language
  • For SA: Develop a standardized regulatory expected credit loss (ECL) for each risk-weighted asset category

Regulators could also eliminate the numerical cap on the Tier 2 capital ratio, helping banks to better plan their capital management strategies. By eliminating the arbitrary distinction between the loss absorption capacity of the allowance for credit losses and CET1 capital included in today’s capital framework, financial reporting by banks regarding their true loss absorption capability will be more valuable to both regulators and investors.

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Defining the CECL parallel run

While most organizations plan to run a parallel CECL process in 2019, defining and implementing an effective parallel run may prove challenging for many. The sixth thoughtware piece in our CECL implementation insights series lays out a roadmap for an effective CECL parallel run, including how your organization can define objectives, plan resources, and successfully implement the project.

Defining the parallel run objectives should be a priority early in project planning and a collaborative effort. Consider three guiding principles as you define the 2019 parallel run:

  • Thoughtfully plan resources to complete the parallel run in tandem with business as usual
  • Make sure the “plumbing works” before 2019
  • Have at least two full parallel cycles including governance, financial reporting, investor communications, and external auditor review

Three distinct phases can be thought of as building blocks and help focus the work:

  • Test the functionality of the production process in 2018
  • Run the operational and internal control portion of the end-to-end (E2E) process for four quarters in 2019
  • Add approval, reporting, and investor communications components for the final two quarters of 2019

The CECL parallel run is critically important and should be well-defined now. Download our report to help make sure you’re on the right track for your 2019 parallel run.

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CECL interdependencies

The implementation of most accounting standards falls primarily on the finance function. But the new CECL standard promises to reach much farther and deeper reach into the institutions it affects. CECL’s many interdependencies, combined with its status as a principles-based standard, sets the stage for one of the most challenging accounting changes in decades.

The fifth webcast and thoughtware pairing in our series examines the interdependencies across the various organizational functions involved in CECL implementations, including governance, modeling, credit analysis, production, and financial reporting.

We address the critical first step in this process—defining the target operating model. This model forms the necessary framework for institutions to manage complex interdependencies and successfully implement CECL.

We also explore the four major categories to consider when planning CECL implementation efforts and the specific interdependencies between them:

  • Governance and oversight
  • Models and data
  • Technology and production
  • Controls, accounting, and reporting

Developing and evolving their target operating model—and understanding the intricacies of these four key intersection points—can help institutions effectively manage interdependencies for more effective and cost-efficient CECL implementations.

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CECL technology impacts

The new CECL standard is expected to have far-reaching implications, comprise many moving parts, and play a larger role in supporting business decisions. Its anticipated impact is driving financial institutions to consider replacing their traditional spreadsheets and legacy IT solutions with a more responsive, configurable platform—one with enabling tools and credit model options to sustain a CECL framework.

The fourth webcast and thoughtware pairing in our series examines how CECL may affect a financial institution’s technology needs, approaches, and investments as they move forward with implementation. It also helps institutions understand how they can put in place the right IT structure, capabilities, and governance to make their transition to a modified or new technology platform a successful one.

Finally, we outline the steps an institution should consider as they begin the platform design and development process. These include:

  • Assessing the potential technology and organizational impacts of CECL triggers
  • Conducting thorough due diligence when selecting solution vendors
  • Getting comfortable with the CECL process before the effective date

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Developing and implementing CECL estimation models

The third webcast and thoughtware pairing in our CECL implementation series examines the key considerations for the successful development and implementation of CECL estimation models.

While the CECL standard is open to interpretation in some respects, there are significant differences between its objectives and those of the current allowance framework. The production of expected credit loss estimates and the related disclosures can be quite complex and place a significant burden on a bank’s infrastructure, processes, and people.

Whether developing a simple or sophisticated CECL estimation model, it is important for banks to understand how the new CECL standard will impact internal functions—namely credit risk, accounting policy, financial reporting, and technology. It is equally critical that they involve these same functions as they modify their existing estimation models or develop new ones.

Our webcast and report explores these considerations in depth and the role they play in designing solutions that are both consistent with the CECL standard and responsive to end users’ needs. We outline the specific steps banks can take to be successful in their CECL estimation modeling efforts—from assessing current allowance processes and leveraging existing data to assembling project teams and defining technology architecture requirements.

Lessons learned from IFRS 9

The first pairing in our series covers valuable lessons from implementations of the International Financial Reporting Standards (IFRS) and how they can be applied to your CECL compliance planning.

There is much that US-based banks can learn from institutions that prepare financial statements under IFRS and have adopted a similar credit loss model under IFRS 9. These institutions have been preparing for this standard since it was finalized in 2014. They have gained insight from the long implementation cycle that can be helpful to US-based filers—specifically around project governance and modeling decisions. Our webcast and written perspective share valuable insights and lessons on a number of CECL implementation challenges, including the steps financial institutions can take to get started:

  • Face the challenge as a team. IFRS 9 and CECL represent the biggest change in accounting standards since standards were established. All of an organization’s functional areas—business, risk, accounting, modeling, and others—should be aligned and work collaboratively to develop and implement new loss estimation models.
  • Ring-fence resources. Engage early and frequently with business and function heads during planning, development, and implementation.
  • Learn early, fail fast, and do both transparently. Test multiple models and validation techniques within the organization’s existing technology to understand potential limitations.

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Related insights

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Current Expected Credit Losses (CECL) —
Focusing on the journey ahead

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