Banks brace for CECL standard

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Financial institutions are getting ready for the Financial Accounting Standards Board’s new credit loss standard, though some are dragging their heels, even as the effective date approaches.

FASB introduced the credit loss standard for financial instruments in June 2016 after unsuccessfully trying to converge its approach to current expected credit losses, or CECL, with that of the International Financial Standards Board. Banks are supposed to start complying with the new standard at the end of 2019, but some are hoping to get an extension. They are getting backing from some members of Congress, who wrote a letter to FASB chairman Russell Golden and SEC chairman Jay Clayton last October on behalf of the American Bankers Association asking for a delay on implementation of the standard.

As of now, though, there haven’t been any indications that FASB or the SEC are willing to go along with a delay. “So far we’re not hearing any actual delays coming, but there’s definitely a community of people out there who would like to see delays,” said James Gellert, chairman and CEO of RapidRatings, a company that helps companies analyze risks such as the probability of default from credit and loan losses. “It’s just at the moment FASB is not suggesting that there will be and it doesn’t appear as though the SEC or anyone else is planning on stepping in. It could still happen. There’s still time, but I think the hope for a quick movement in D.C. towards a delay is diminishing rapidly.”

Smaller banks are at a disadvantage compared to the big banks in getting up to speed on the new credit loss standard, especially as they also need to deal with the revenue recognition and leasing standards whose effective dates come ahead of the CECL standard.

“We’ve got to remain vigilant as we get closer to actual implementation, or even in 2019 when banks will begin mirroring the CECL reporting, with full reporting formally starting in 2020,” said Gellert. “But I think the biggest change that I see as we roll into 2018 is greater focus on speed and realization that the time is now to act. For those firms that haven’t been planning anything, the time’s really up and they’ve got to get with it. For the firms that have been planning, now’s the time to execute. And for the firms that have been executing, now’s the time to make sure that they’re executing properly. And there are very few of those.”

Some banks seem to be ahead of the curve in getting ready for CECL, including Bank of America, KeyBank and Citizens Bank, according to Gellert.

“There are some banks that we’ve been hearing talk in the marketplace that really seem to be on top of things, firms that are in the top tier and then the super regionals that seem to be really getting their houses in order,” he said. “But there’s still a ton of firms that are not yet ready, and they’ve only got 2018 to put plans and systems in place. I think we’re moving from the 2017 period, which was exploratory, hopeful that something would delay this, but now that we’re in ’18 we are really in a ‘everyone’s got to get moving’ mode. That seems to be the mood among the banks.”

Outside the financial industry, most companies have been putting CECL on the back burner, reasoning they won’t be affected as much by that standard as by the revenue recognition and leasing standards. But many of them may need to deal with the credit loss standard eventually too.

“The corporates, which are also affected, very few are focused on CECL, and we find many, many haven’t even heard of it yet,” said Gellert. “Clearly it will be less of a burden on them than it will be on the banks, but for any of the corporations that have leasing businesses or deferred revenue subscription businesses, they will be affected, and so far they really don’t seem like they’re totally ready.”

Smaller banks are also dragging their heels on getting ready for CECL, and for good reason.

“They’ve got fewer resources,” said Gellert. “Of course they’ve got smaller loan books, and they may not be as diversified in their assets. For instance, a smaller institution might not have a credit card business, or might not have potentially a residential lending business or commercial real estate lending business. Some of the asset classes that a bigger bank will have, the smaller ones may avoid, but they still will have significant information and data needs. That means a big burden on technology to help them execute. I think for the smaller banks in particular, one of the issues that they have is how to build an internal modeling framework with limited historical data. For those firms that are going to try and save money and not go to an outside vendor, they’re going to need external data validation of their loan books. That means a lot of outside resources and a technology budget to digest that data and an ability to assimilate that data into their workflow process.”

The larger banks will be able to rely on their internal IT departments in many cases, but they will also have challenges dealing with different IT systems they may have inherited from the smaller banks they’ve acquired over the years.

“The big banks of course have more IT infrastructure to be able to handle that data,” said Gellert. “Commensurately, while they’ve got the IT infrastructure, many of the big banks have grown through acquisition, and M&A invariably leaves legacy systems that are unintegrated. You can imagine some of the larger banks that are amalgamations of five, six, 10 institutions having three, four or five different systems in place internally, an Oracle system, an SAP system, this and that. Many of these are not integrated, and there’s a data cleanup and data organization exercise that the banks need to go through, so the technology need for implementing CECL affects large and small banks. It just affects them in different ways.”

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CECL Accounting standards Accounting software Banking Financial reporting Bank of America Keybank Citizens Bank