Two current expected credit loss (CECL) themed events drew the attention of RapidRatingsTM this month. FASB assembled its Transition Resource Group for Credit Losses (“TRG”) on June 12th at Norwalk headquarters. TRG is an advisory committee that FASB put together early in 2016, ahead of releasing the ASU. It consists of 16 members, drawn mostly from audit and banking industries, and six official observers, coming mostly from Washington. RapidRatings and others sent attendees, as well.
FASB Transition Resource Group for Credit Losses Meeting
FASB and TRG conducted four hours of highly technical discussions according to a previously announced schedule. Days earlier, however, press reports had suggested FASB might hear directly about the continuing opposition that many banks and credit unions were still mounting to CECL. But there was no mention of any such opposition in the public sessions.
The next day the SEC Chief Accountant was quoted in the WSJ to the effect that CECL was proceeding according to FASB’s plan and would not be sidelined by the US Treasury’s new reform agenda, just released in the Department’s first Report to President Trump. It is worth noting, however, what Secretary Mnuchin and his co-author wrote about CECL in that release: “It is unclear if such changes are needed to promote a more robust U.S. banking system.”
GFMI's 2nd Edition CECL Conference
More broadly informative for CECL’s constituents was GFMI’s 2nd Edition CECL Conference in Chicago on June 19th and 20th, where speakers included veteran researchers from the Fed and the OCC, CECL experts from the consulting industry, senior enterprise risk executives from major banks, and RapidRatings CEO, James Gellert. Although the bank executives in attendance were among their industry’s most advanced CECL planners, in their unanimous view there was no light yet at the end of the tunnel in their CECL preparations.
Nearly every speaker identified internal loan data as a primary challenge: acquisition, lineage, interpretation, presentation to external parties, storage and retrieval. Some practitioners expected the problem to diminish over time as they applied much higher custody standards to new data accumulations in the wake of CECL’s onerous demands. Some practitioners also cautioned that they would need to take extra care in parsing longer-dated loan data according to their present, higher underwriting standards, rather than making unnecessarily large Estimated Loss projections based on undifferentiated past experience.
Both the speakers and the attendees from the banking industry affirmed their commitments to the PD-LGD approach in commercial and industrial (C&I) loan portfolios, among the several approaches that CECL will allow. Banking executives offered differing views of how far their confidence levels would extend in loss prediction and how readily they would be able to adapt longstanding CCAR or other modeling in inventory to their CECL needs.
Dan Cope, a partner at Oliver Wyman, stressed how far a more thoughtful CECL system up-front could go to reduce costs and improve decision-making and how much more granular such a system had to be to meet CECL’s rather than previous prescriptions. He spoke about the radically increased demands for data quality and integrity and about management’s eventual need for monthly or even daily Estimated Loss reporting for planning, pricing and reserving purposes. He stressed that automation had to be the goal of CECL planners, wherever it could be achieved. Read more on this view here.
Drawing on Third Party Risk Management to Tackle CECL
James Gellert began his remarks by making clear that there was no single faultless analytical approach to C&I loans. He then went on to press what he said was the straightforward case for quantitative over qualitative in baseline surveillance: quantitative alone permits automation -- which is the only way, absent radical staff enlargements, that lenders can possibly address the scale and frequency that CECL will demand. Qualitative’s role is as overlay, on a case-by-case basis.
Gellert told attendees they could glean special insights on their CECL challenges from the focus that federal regulators have put on Third Party Risk Management in recent years and the efforts that large banks have had to make, in response, to substantially upgrade data acquisition and interpretation and to sharply improve communication among the CFO, the CRO, IT, Credit and Audit. He pointed out that the onus in TPRM has been on private-company surveillance, as he reminded them it would be in CECL on the C&I and SBL sides. He said our leadership role in TPRM informed our ambitions on the much larger CECL front.
Download our Term PD Whitepaper to learn more about RapidRatings' CECL offerings.