Insights

Current Expected Credit-Loss (CECL) Accounting: It's Time To Get Moving

CECL will reduce the underlying profitability of many lending products; smart institutions will respond with a range of tools, including product structuring, pricing and collections.
Ross Eaton, Partner, Oliver Wyman

As a result of the Financial Accounting Standards Board’s (FASB’s) changes to credit loss accounting, financial institutions will require additional capital and will need to make significant changes to their loss forecasting methodology and infrastructure. Though the impact is most significant for banks, insurers and other financial institutions with credit portfolios will also be affected.

The 2019 deadline may seem like a long way off, but implementing CECL will be more complex than many institutions realize, in terms of methodology, data, systems and disclosures. CECL will also be more time consuming and more costly than many institutions think. In our paper, “Current Expected Credit Loss (CECL) Accounting: It’s Time to Get Moving” we recommend a series of steps to ensure firms meet that deadline without undue stress.

CECL: Implementation Deadlines


CECL: Key Implications

Key Impact Areas Implications
  • Larger allowances for most products and lower capital ratios
  • Additional volatility in allowances and capital ratios 
  • Overall reduction in ROE, greatest for products with longer expected lifetimes (e.g. mortgages, commercial real estate) and "high risk, high return" segments
  • As a result, changes to product structuring, pricing, collections practices, securitization and loan sales
  • Significant methodological challenges requiring new models or adjustments to existing approaches
    • Generation of macro-economic forecasts
    • Accuracy of benign period and near term forecasts
    • Increased importance of prepayment forecasts to historical estimates
    • Supervisory treatment of unconditionally cancellable commitments
    • Forecasting of future allowances and provisions  
  • Integration of a large number of risk and finance data elements across a broad range of business functions
  • Sarbanes-Oxley controls over data and system and external audit of results

 

  • More regular, rapid production of loss forecasts (as frequently as daily)
  • As a result
    • Greater automation and integration of systems to support complete automation (in the case of daily runs)
    • Expanded technology capacity and capability to support multiple concurrent model runs and reduced cycle time
  • More granular disclosures
  • Significantly greater challenge to explain results to stakeholders and to account for changes from period to period within public reporting deadlines

Current Expected Credit-Loss (CECL) Accounting: It's Time To Get Moving


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