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Implementing a CECL Response Program

Organizations will need to modify or redesign their loss reserve processes and systems based on the new CECL standard in light of the substantive changes in methodology. As CECL requires a forecast of loan losses over the life of the instrument, both at the time of origination as well as the revaluation on an ongoing basis, entities will need to capture, analyze, and warehouse transaction history over longer time horizons and with increased granularity. This ongoing requirement for additional data elements over longer time periods needs to be incorporated into an entity’s standard operational processes and systems.

Technology, finance, and risk teams need to work in tandem to assemble the data, systems, processes, procedures, controls, and reporting required for a successful CECL implementation. Specifically, the following components of a CECL implementation must be considered:

  • Segmentation of asset types: Identification of key risk characteristics by which asset pools can be stratified (e.g., asset class, vintage, remaining term, counterparty credit rating, geography)
  • Aggregation and analysis of historical data: Construction/modification of a data warehouse containing detail data with all required attributes
  • Historical loss experience: As a return to historical losses is a key component of CECL modeling in outer years, this measure by segment must be calculated based on actual results
  • Qualitative factors: Determination and application of macroeconomic variables which are correlated to the modeled expected credit losses (e.g., unemployment rate, inflation)
  • Scenario development: Multiple models should be constructed and back-tested to determine those that most closely predict actual credit losses incurred
  • Numerical analysis and assumptions for narrative: Production of disclosure exhibits with narrative regarding methodologies, changes in projected losses, etc.

If you are interested in learning more about the rationale and timing for the accounting change, as well as the financial process and system changes required to comply, please download our new guide: Building a Current Expected Credit Loss (CECL) Response Program.

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