Robin Sawyer | Partner | Dixon Hughes Goodman, LLP
Your focus relative to CECL is on what you need to do to get prepared for the new accounting standard. You’re concern is charting a path to a CECL-compliant model that suits your bank and portfolio and that will pass muster with your auditors and regulators. But you will also need to educate the people around you in the bank, because the impact of CECL will be enterprise-wide.
That includes your Board. And your presentations about CECL to your Board will involve an entirely different set of explanations. Their concerns will be far different from your auditors and regulators, related to their fiduciary responsibilities. What will be the effect on the bank’s financial statements? On capital? How much will all this cost? In this presentation, Mr. Sawyer will help you anticipate your Board’s concerns and questions.
- Find out your board’s concerns.
- Document everything for your audit committee.
- You need a plan, a team, a peer group.
- Talk to vendors about costs.
10 questions your board might ask:
Q 10. What is the plan and who is leading the charge?
The first thing to do is name a project manager and team. If you’re in charge of the model, is the leader you? You need a plan for transition. The process will be more complex, and you will need auditor and regulator input.
Q9. Can we use our existing model or do we have to outsource?
We don’t see how you can do it in Excel. In moving from Excel to software, think about how to support that with your auditors. So your model will likely be different. PD/LGD is common among smaller institutions.
Q8. What will this cost us initially and ongoing?
In addition to upfront and ongoing costs, be mindful of hidden costs as we learned in relation to SOX. And if you’re a team of one, you better find some other team members.
Q7. Which loss methodologies will you use and why?
You need to understand the different types of models and what’s easiest to support. Will your chosen model or models be able to grow with you, not just comply with CECL but help you manage risk. Vintage is one type of data that will be needed.
Q6. What about data?
- Do we have the appropriate historical data?
- What do we need to start tracking now?
- Can our current system capture the data we need?
- Will new systems be needed?
- Review in connection with both the model decision and loss methodology decision.
Q5. How will credit and accounting interact using the new approach?
What is their view on key performance indicators, pooling loans, reasonable and supportable assumptions, average loan life?
Q4. What will our regulators be expecting in terms of detail, model choice, methodology, and bottom line results?
- Foreshadow your expected results
- Get buy-in from regulators and accountants
Q3. What is the expected impact on our financial statements and capital ratios, considering also:
- Basel III phase in requirements
- New leasing standard
- Anticipated growth and balance sheet changes
- Show us a picture: exactly what does day-one implementation look like?
Q2. Will we be outliers versus our peers upon adoption?
- What is everyone else our size doing?
- What are the largest banks saying about adoption?
- Compliance vs. accuracy: how do we know the new answer is accurate and meaningful?
Q1. Risk management: what should we be doing right now?
- Impact analysis on our organization
- Model risk governance – variations in small, mid-size, large banks and credit unions
- Enterprise risk management – it’s not just an accounting challenge
- Understanding the model/methodology
Larger institutions have a lot of infrastructure in place already. Smaller institutions have some catching up to do. If you break portfolios down to a granular level, and if you have good data, you might find your ALLL will be about what it is now. If your allowance doesn’t go up, regulators will be suspicious, unhappy.
Your committee and board: what is their concern? Risk management. Enterprise risk management. You have to document correct and supportable information to your audit committee – you need a plan, a team, a peer group; and talk to vendors about costs.