CECL Software Solutions
The Financial Accounting Standards Board has issued a proposal to delay the compliance deadline for CECL, or the Current Expected Credit Losses accounting standard, until January 2023. The proposal is currently out for public comment through Sept. 16, so make your voice heard!
That said, this is not something credit unions and community banks can ease up their compliance efforts around. One of the key reasons for the delay, according to Compliance Week , is that even large, public companies are having difficulty implementing CECL among other accounting standards they must follow. Under CECL, financial institutions must recognize the expected losses over the lifetime of a loan.
FASB Chairman Russ Golden said in a statement , “This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards.” Typically, FASB gives smaller organizations an extra year for compliance with its standards, but that doesn’t seem to be enough this time around. Additionally, the chairman’s statement indicates it’s not looking to create exemptions, for which credit union and community banks trade organizations have advocated.
American Bankers Association President and CEO Rob Nichols told the ABA Banking Journal a month ago after the delay was under consideration, “a partial delay without a requirement for study or reconsideration simply kicks the can down the road – it does not reduce the ongoing data, modeling and auditing requirements facing smaller banks or address the increased procyclicality it will cause.” He added that implementation is proving to be more difficult and expensive than originally thought to be and that banks of all sizes should be included in the delay.
Under CECL, credit unions anticipate collecting 22% more data points than they do presently.
Credit union trades have also been calling for a delay, if not an exemption, for credit unions, Credit Union Times has reported. Legislation has been introduced in the House and the Senate to delay implementation until the primary financial regulators have had a chance to study the situation and submit the research to FASB.
GDS Link does not disagree that a certain misalignment exists between FASB’s goals – for outside investors to have better insight – and credit unions, the vast majority of which cannot have outside investors. Nor did credit unions, generally speaking, engage in the risky lending practices that brought on the economic crisis of 2007-08. But as we’re looking into an economic slowdown next year – and signs are mounting – being able to better estimate and account for losses is not necessarily a bad thing. Community financial institutions must prepare themselves for greater loss reserves, as well as reduced earnings and capital.
FASB has not prescribed a modeling method to account for the scale of various types of financial institutions, however, FASB identified three key considerations that must be present in the measurement of expected credit losses:
1 Relevant information about past events, including historical experience
2 Current conditions
3 Reasonable and supportable forecasts that affect the collectability of the reported amount
For very small institutions, FASB, NCUA, and the other banking regulators have offered one voluntary option: the weighted-average remaining maturity, or WARM, method.
One of the key anticipated costs to implementing CECL surrounds data collection and warehousing. As compared to the incurred loss methodology, CECL will likely involve increased data requirements. Additionally, credit unions may desire to maintain loan data over an entire business cycle. While the specific pieces of loan data used in a CECL model will vary, some common ones may include origination dates and balances, maturity dates, changes to delinquency status, loss history, borrower information including risk indicators, and other segmentation data. In a recent survey of NAFCU members, respondents reported that they anticipate collecting 22% more data points than they do presently. In addition, credit unions may want to recover and scrub historical data, if available, to populate the new data fields under CECL. In that same survey of NAFCU members, respondents said that on average they plan to incorporate six years of historical data.
Even with a year’s delay, financial institutions should not procrastinate. After implementation, a year of testing is recommended before the final implementation date. It will be here before you know it!