OVERVIEW
The new accounting standard CECL (Current Expected Credit Loss) will go into effect in 2020. It was issued by the FASB (Financial Accounting Standards Board) and will change how financial institutions account for and record credit losses. Banks will need to record credit losses at origination and calculate based on a “life of loan” loss expectation. In addition, they’ll need to forecast all future losses. Changing future economic conditions are going to play a large role in determining the credit loss estimate for CECL, so having accurate forecasts will be key.
CHALLENGES
Challenge 1: Calculation complexity
While manual spreadsheets such as Excel will still be acceptable means of bookkeeping for CECL, they most likely won’t be able to keep up with the more complicated and complex calculations that are going to be required. Banks should adopt new automated processes to streamline calculations and allow banks to accurately document their calculations.
Solution: Workflow Automation and Business Rules Management System
Banks will need a system that’s flexible and adaptable, like a business rule management system that can work alongside a core system. CECL software allows banks to create and run test models so they can assess the complexity of their calculations.
Challenge 2: Deciphering Trends
Accurately forecasting expected loss is one of the biggest challenges that CECL presents for banks. They won’t be able to count on manual processes for modeling and calculating life of loan losses. FASB has identified some loss rate methods, such as vintage models and discounted cash flow methods. But banks will still need to understand how their loans migrate to different risk categories over time to determine which estimation model will work best with the bank’s current loan portfolio.
Solution: Analytics and Reporting tool
Adopting CECL software with a built-in analytics and reporting tool will give banks the analytical support they need to accurately forecast their loss rates. These types of systems take data from several sources and analyze it in a core framework with several types of modules. The reporting tool will automatically generate reports based on the data that’s been analyzed to help banks figure out if their loan portfolio needs to be completely overhauled and which loan types, if any, should be avoided. The reporting tool can help a bank make informed decisions about their capital needs so they can make plans for the future.
RESULTS
Our CECL application offers a solution for banks and financial institutions making the transition to CECL, including:
With our CECL software, you can access historical information and easily adjust for both past events and future conditions, allowing you to develop reasonable forecasts of expected credit losses over the life of each loan and asset. Use different methodologies based on the asset pool and subcategories that you choose to create for your asset pools.
CECL offers several loss rate methods, including static pool, remaining life, and vintage, along with non-loss rate methods, like discounted cash flow and probability of default. These features make it simple for organizations to customize calculations based on their data and needs.
Assessing credit risk is a major component of CECL. Our software uses advanced PD/LGD models to let you reuse and adjust historical loss methodologies (e.g. vintage analysis, loss rate, or net flow rate) as your accounting standard. You can assess credit risk on both an individual and collective basis.
Our compliant methodologies include a fully advanced PD/LGD model and discounted cash flow. You can make these calculations at the contract level and incorporate expert judgment into the calculations to achieve the level of accuracy that’s required for calculations and analysis.
Advance from a tactical solution to a strategic one that meets all CECL compliance guidelines with our scalable solution. Our flexible Expected Credit Loss calculators can work with multiple scenarios, including macroeconomic scenarios and expert judgment.