Rapid Ratings Blog

CECL Prospects Alarm Banks and Galvanize RapidRatings

Posted by Rapid Ratings on May 22, 2017
iStock-521002556.jpgIt is clear that 2017 is shaping up to be a year of ever-increasing discomfort for the US banking industry as it confronts the full implications of the radical changes in credit-loss accounting known as CECL (Current Expected Credit Loss) that FASB announced last June. Under CECL rules banks are scheduled to transition from longstanding, backward-looking “incurred-loss” reporting to forward-looking life-of-loan “expected-loss” reporting. Banks and respondents in other industries will assume similar burdens on receivables, leases and securities held to maturity.

CECL is revolutionary by many accounts and the burden on banks to completely revamp their methodology and process for calculating losses has many CFOs worried.  A recent WSJ article  revealed that CFOs at 18 US regional banks had written Treasury Secretary Steven Mnuchin weeks earlier to enlist his help in overturning the new rules. The reporter highlighted a similar letter to the Secretary from the American Bankers Association following a meeting he held with community bankers in early April. The reporter recalled a corresponding meeting in February at FASB headquarters in Connecticut, where community bankers and others “slammed” FASB in the presence of the industry’s leading regulators and auditors. Nonetheless, auditors and regulators are still pressing banks to get on with their planning and delay based on the hope of radical curtailment appears risky.

Criticism has focused on widespread expectations of sharp increases in loan-loss reserves, decreases in profitability, and runaway expenses in data collection and analysis and in the new modeling necessary to predict future losses at scale.

An Automated Solution for Term PD – The Biggest Challenge to CECL Preparedness

Against this heated backdrop and in order to help banks and other entities that extend credit, RapidRatings has introduced a Term Probability of Default (Term PD) Model with a forecast horizon of up to ten years.  This new solution delivers company-specific and pooled PDs on an annual basis out to ten years comprehensively and cost-effectively on any bank’s Commercial and Industrial portfolio or Small Business Loan portfolio, at any scale.  To learn more, download the Term PD Whitepaper.


The Term PD Model is a point-in-time (PIT) algebraic extension of RapidRatings' two longstanding measurements of financial and operating efficiency and resilience: the Core Health Score and the Financial Health Rating (FHR®). The former is an econometric model that differentiates weak from strong entities authoritatively; the latter is a probabilistic statistical classification model that achieves proven 12-month PD estimations. Together, these two models apply the very same 70-plus ratios to the financial statements of however many public and private companies the subscriber chooses. The models then weight the results according to 24 separate industry profiles. The ratings are entirely quantitative and therefore entirely automated.

It has become clear over the last three years, as third-party risk management (TPRM) continues to mature as a discipline, that analytical consistency in evaluating the financial health of public and private companies has been indispensable to financial services companies in establishing confidence among their auditors and examiners -- external constituents who will be even more militant around CECL representations when that compliance deadline passes.  An automated and scalable solution like the Term PD Model can provide that assurance and ease the burden of compliance.

Topics: Third-Party Risk Management, CECL