CECL Implementation Strategies for Small and Midsized Banks

The accounting standards on current expected credit losses, commonly known as CECL, will have a significant impact on the banking industry within 2019 and into the future. Midsized banks will face many new challenges as they implement and adhere to CECL.

At the time of writing, CECL compliance will become required by banks, regardless of size, beginning in 2021. As such, banks should start their CECL bank implementation strategies as soon as possible, if they have not done so already.

CECLBank Implementation Timeline

Before getting into CECL bank implementation strategies, be sure that you understand the deadline for your bank’s implementation. The first deadline arrives on Dec. 15, 2019, at which point any public business entities that file with the SEC must have adopted CECL guidelines for the fiscal years that begin after this point.

The next deadline is a year later, Dec. 15, 2020. At this point, all other public business entities must adopt the CECL guidelines for the fiscal years starting after this date. In November 2018, the Financial Accounting Standards Board updated the CECL standard timeline.

With this update, credit unions can delay implementation for the fiscal years that begin following Dec. 15, 2021. This delay applies to all non-public business entities (PBEs), a designation that includes credit unions. Before this update, non-PBEs must have met the second deadline in 2020.

You can choose to engage in early adoption starting with any fiscal year that began after Dec. 15, 2018.

CECLComponents and Changes to the System

The idea behind the CECL model is to improve how banks issue their credit accounts for potential losses and balance sheet reserves. Currently, most banks use a model known as an incurred loss.

This requires banks to recognize credit losses on loans in situations when the remaining amounts due are unlikely to be collected. With CECL, this loss model changes and bankers calculate the future losses with a model known as an expected loss.

This involves forward-looking data, including reasonable forecasts and current economic conditions. Overall, CECL will lead to immediately recognizing expected lifetime credit losses at the time of purchase or origination of a financial asset.

Most experts agree that when CECL goes into effect, banks will need to have allocated additional capital to account for their potential losses. This is likely to force certain banks to reevaluate strategies for both investment and capitalization.

Early Adoption Might be a Worthy Challenge Logistically

The dates for CECL implementation are still reasonably far in the future for certain banks. Remember that any midsized or small banks that file with the SEC will need to be ready by Dec. 15, 2019, just a short 10 months away.

Banks who do not file with the SEC will have a further year from that point, and credit unions and other non-PBEs still have an additional year. Even so, banks of any size will likely be best off if they begin the process of implementation right away.

There is no restriction on when you can begin implementation, but early adoption will give you a chance to work out any kinks in your strategy. This will also help you avoid around-the-clock hours and last-minute stress that could lead to accidental non-compliance and consequences.

Once you are sure what your deadline for CECL bank implementation is, it is time to figure out your strategy. Start by determining the amount of time of external assistance you will actually need to comply.

It is unlikely that a small or midsized bank has a large enough team to tackle this by themselves. You will need to get at least several experts to assist your internal audit and accounting teams. You just need to evaluate how much assistance you require.

What Do Small and Midsized Banks Need to Do to be CECL Compliant?

To become compliant, start by gathering data on your bank’s losses and loans. From there, organize loans based on their risk level. This can be time-consuming if your loan data is scattered, which is likely.

Once you have the loan data in a single location, you need to develop loan pools based on the risk level. CECL does not require specific methodology, so your bank must choose a verifiable and well-documented method of estimating risks.

This is the time for parallel models, where you can test various methodologies. Run parallel models to determine which is best for your bank.

Potential Variations in Rules, Dates and Regulations for Credit Unions

As mentioned, credit unions will have an extra year to implement CECL. This delay was partially the result of a strong push from various organizations, including CUNA or the Credit Union National Association.

Thanks to efforts from CUNA, it is also very likely that the FASB will give credit unions relief from certain aspects of CECL. It remains to be seen, however, whether this will be the case and what that relief would involve.

The bottom line is that banks of all sizes should already be gathering information for their CECL bank implementation, if not already testing methodologies. Time is of the essence, and you need to start now.

Bonnya Mukherjee
Financial Analyst, Pegasus Knowledge Solutions

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