Preparing for CECL questions during 2018 bank exams
Bankers preparing for the Financial Accounting Standards Board’s new current expected credit loss model, or CECL, have many questions about implementation, including what to expect in the way of CECL scrutiny during 2018 visits from banking examiners.
They got a glimpse of an answer in June when federal banking agencies hosted a webinar to respond to questions from community bankers about the new credit loss accounting standard. Questions asked during the webinar included what community institutions could anticipate relating to CECL during 2018 examinations and whether regulators had a standard set of expectations.
Generally, officials from the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Conference of State Bank Supervisors, responding on behalf of regulators, said that the focus of examiners will be on CECL preparation efforts.
“Please note, at this stage our focus is on information gathering and we are not examining for CECL at this time,” said Jami Flynn, director of supervisory processes for the CSBS.
Sydney Menefee, the OCC’s chief accountant, added, “Similar to the CSBS, FDIC and Fed, the OCC’s focus is CECL readiness, and we are not examining for CECL.”
John Reiger, the FDIC’s deputy chief accountant, said that community banks can expect that examiners will be interested in and asking about how institutions are progressing in their preparation for CECL. He referred to one of the Frequently Asked Questions that agencies answered in December 2016 related to how institutions should prepare for implementation. Here are 10 suggestions included in that resource that Reiger reviewed during the webinar:
1. Become familiar with the new accounting standard and educate the board of directors and appropriate institution staff about CECL and how it differs from the incurred loss methodology;
2. Determine the applicable effective date of the standard based on the PBE criteria in U.S. GAAP;
3. Determine the steps and timing needed to implement the new accounting standard;
4. Identify the functional areas within the institution that should participate in the implementation of the new standard;
5. Discuss the new accounting standard with the board of directors, audit committee, industry peers, external auditors and supervisory agencies to determine how to best implement the new standard in a manner appropriate for the institution’s size and the nature, scope and risk of its lending and debt securities investment activities;
6. Review existing allowance and credit risk management practices to identify processes that can be leveraged when applying the new standard;
7. Determine the allowance estimation method or methods to be used;
8. Identify currently available data that should be maintained and consider whether any additional data may need to be collected or maintained to implement CECL. Examples of the types of data that may be needed to implement CECL include origination and maturity dates, origination par amount, initial and subsequent charge-off amounts and dates, and recovery amounts and dates by loan; and cumulative loss amounts for loans with similar risk characteristics;
9. Identify the necessary system changes to implement the new accounting standard consistent with the new standard’s requirements and the allowance estimation method or methods to be used; and
10. Evaluate and plan for the potential impact of the new accounting standard on regulatory capital.
Menefee said that as part of the OCC’s recently completed periodic monitoring at community banks, examiners discussed with supervised institutions some of the same readiness topics that Reiger mentioned. “We expect those conversations to continue,” she said.
"We have had the pleasure of helping our clients prepare for these supervisory visits,” said Garver Moore, managing director of Sageworks Advisory Group. “While examiner questions have been preparatory in nature, they have often required the institution to be planning in detail regarding critical assumptions, likely outcomes and problems that may arise."
Flynn noted that the CSBS in partnership with the FDIC and Fed has developed tools to help financial institutions plan for the eventual implementation of CECL and to help evaluate CECL preparedness.
Other training resources and materials are available to help banks and credit unions make the transition in their allowance for loan and lease losses calculations (ALLL), including complimentary webinars and whitepapers, as well as Sageworks’ series of CECL Transition Workshops, where participants receive hands-on training for tackling CECL in a practical way at their own institutions. Additional resources include a CECL Prep Guide: Implementation and CECL Methodology Webinar Series.