The day is coming – December 31, 2021. That is the deadline for Current Expected Credit Loss (CECL) to be implemented for privately held community banks. As we broach this topic with bankers, there seems to be two options that are available. At the end of this paper, we’ll provide a third option that you may not even know exists.
Here’s a quick refresher on CECL and what it means to you:
- CECL is an accounting rule change for how banks reserve for loan losses. It will replace the old FAS 5 (ASC Subtopic 450-20), FAS 114 (ASC Subtopic 310-10), and the quantitative factors that regulators have asked banks to consider when making adjustments to their historical loss calculations.
- Banks will be required to forecast expected losses for every loan in the bank (including the new one you just made yesterday) using a variety of forecasting and modeling techniques.
- EVERY BANK is required to comply.
- Most industry experts expect the new accounting rule will lead to increasing reserve requirements. Some estimates believe as much as 25-40% increase.
- The deadline for converting to the new accounting rule is December 31, 2021 for privately held banks.
- You’ll truly need a solution in place before the deadline date, in order to have data points that prove you are CECL compliant.
- It is the biggest change to the banking industry in the last decade.
I know. That’s some heavy information to take in. Right now, bankers are taking one of two options. A third option exists – something to make your life easier, but we’ll get to that. Here’s the two options banks are using right now:
Option 1 – Procrastinate
December 31, 2021 is a long way away. There’s a ton on your plate now, and there’s no reason to focus on something so far away. After all, regulators will change their minds several times between now and then, so there’s no reason to deal with CECL right now. You have bigger fires to put out at the moment.
Option 2 – Buy an Expensive Software Package that Your Bank May or May Not Need
We see this all the time, and not just with CECL. If a banker has a need, you can bet there’s a software vendor out there with a solution. An expensive solution.
Has this ever played out in your bank?
A software salesman targets a member of executive management. The sales demonstration is amazing. You are so relieved that a solution exists to fix the problem. You consult with the rest of the executive team, and make the purchase. It’s expensive, but you can’t get over how much it will save you on reduced personnel and through improved efficiency.
Then your staff begins implementing and using the software. Everyone quickly realizes this wasn’t as glorious as promised.
The person in charge of implementing the software is not the same person who sold it. You have to do a bunch of preparation on your existing data or core system before the software can “talk” to all your other software. Now, in order to run the new software, someone must be trained or hired to be the subject matter expert. Then you need to get with your IT contact to make sure your IT infrastructure can even handle the new system. On top of that, you have to update your vendor management file on this vendor, and update your Business Contingency Plan in case something happens with this vendor.
Don’t worry. Neither of those options would sound great to most of us.
That’s why we came up with a CECL solution that fits most community banks.
Our Solution: Due Diligence
We believe prudent risk management invests a little time and money during the due diligence period. Community Bank Advisors personnel can help your team determine what variables should be a part of your CECL forecasting methodology. By understanding your loan data and how it is broken down, you stand a much better chance of knowing whether a five-figure software solution is really necessary.
The secret to CECL is most banks are breaking down their loans according to schedule RC-C or something very similar. Unfortunately, CECL requires a more granular look at these loan categories. Our team can help identify those data fields, and then help your team come up with the ideal solution for CECL compliance at a fraction of the software cost.
We can ensure that your compliance with CECL is smooth. We’ll assess your needs, give recommendations, and solve a ton of your unanswered questions about this new regulation.