Current expected credit loss, or CECL, is a relatively recent account standard that has shifted how financial institutions account for their expected credit losses.
Developed by the Financial Accounting Standards Board (FASB) in 2016, CECL replaces the former standards for accounting for credit losses (FAS-5 and FAS-114). CECL requirements apply to any financial institution that issues credit, including banks, credit unions, savings institutions, and holding companies filing under the GAAP accounting standards. More specifically, the rules affect any entity with net investment and financial assets in leases that have not been accounted for at fair value through net income.
Effective dates for the CECL standards are phased according to institution type:
- Public businesses entities that are US SEC filers: Effective as of December 2019
- Credit unions and other lenders: Effective in January 2023
One of the most notable effects of CECL standards is the significant change in the accounting standards used to determine the proper level of balance sheet reserves used for credit losses.
Although the United States CECL standards are measurably different from the international IFRS 9 standard, they share a key similarity: calculations of expected credit loss are now to be computed over the full life of the loan. Previously, banks operating under the incurred-loss model recognized losses when they arrived at a probable threshold of loss. It is widely believed that the prior method led to the drastic underrepresentation of impairments and calculations of potential future losses.
NXTsoft has developed an innovative CECL software solution, streamlining compliance across the board. OmniLytics CECL eliminates the guesswork associated with CECL requirements, saving your financial institution time, effort, and expense.
Why is CECL Important?
The CECL standards have had a marked impact on all financial institutions. Not only does CECL change the way banks calculate credit loss reserves, but it also directly affects organizations’ management of ALLL and finance and risk management processes.
Because of CECL, financial institutions are facing the need to adjust how they manage risk and financial data, share information inter-departmentally, and construct analytic platforms. These adjustments are largely due to the fact that CECL requirements institute increased expectations for loss modeling, analysis, and reporting.
Although the scope of CECL changes may vary across financial institutions, initial filing results have demonstrated that the effects can be substantial:
- Higher loss reserve levels have been frequently reported
- Future stress tests are expected to reflect changes
Whereas macroprudential stress tests have formerly been focused exclusively on larger banks, CECL requirements extend to all financial institutions.
What is the CECL Methodology for Estimating Credit Losses?
The CECL outlines three key considerations that should be present in the estimation of expected credit losses:
- Applicable information about past events, which includes historical experience
- Present conditions
- Supportable, reasonable predictions that affect the reported amount’s collectability
Other than this basic framework, there is no specific model that must be adhered to. FASB understands that institutions must use their best judgment throughout the decision-making process.
Understanding CECL Challenges
There are certain challenges involved in CECL implementation, including:
- Methodology and modeling challenges: Although CECL requires banks to create a methodology for estimating credit losses, there is no clearly specified model/approach. Although flexibility can be a benefit, it can also present difficulties. The potential modeling challenges include the following:
- Choosing the most appropriate model to calculate expected credit losses
- Shifting current models to align with CECL data collection requirements
- Weighing the pros and cons of estimating credit loss at an asset level vs. portfolio level
- Operational challenges: Organizations will often need to revamp processes and workflows to align with CECL requirements effectively, which can lead to varying operational issues, such as:
- Adapting IT processes for data collection at a granular level
- Accuracy and integrity of data
- Increased demand for system capabilities and controls
- A significant need for automation and system integration
- Potential increase in operational costs to allow for compliance
- Higher disclosure requirements
- Expanded internal control requirements
Why are Credit Unions Subject to CECL?
Although many experts are unsure that the CECL standard aligns with the credit union industry, the FASB has opted not to create any exemptions.
Why Did FASB Change to the CECL Standard?
From the stated perspective of FASB, the incurred loss model fell significantly short during the financial crisis of the early 2000s in a number of ways:
- There was a delay in recognizing credit losses
- Credit losses were not recorded until meeting the “probable” threshold, which typically coincides with impairment
FASB felt that a forward-looking approach to credit loss estimation would more effectively align loss estimates with present and expected economic conditions.
FASB perceived a lack of transparency regarding lenders’ credit loss exposures, leading to bank share values falling before any credit losses were recognized. And finally, FASB determined a need for a model to prepare financial institutions for economic recessions better.
The CECL standard was developed to address and resolve the above concerns of the FASB.
OmniLytics CECL is a CECL solution developed by NXTsoft, engineered to simplify the process of producing quarterly CECL reports. It is a comprehensive software program that has received independent third-party validation, guiding users through the complexities of CECL compliance with smart, scalable solutions.
What NXTsoft Does to Produce Your Quarterly CECL Report
When you choose OmniLytics CECL, you gain an active partner in CECL compliance. NXTsoft provides extensive support in CECL implementation, generating quarterly CECL reports by:
- Gathering required financial data from all call reports
- Completing required calculations utilizing the open pool method
- Performing required peer calculations
- Collecting and analyzing qualitative factors using our symmetrical matrix
- Assisting in the development and execution of required adjustments to accurately reflect your situation
- Ensuring you are prepared for the exam
What Your Financial Institution Does To Help NXTsoft Produce Your Quarterly CECL Report
Your organization will be relieved of the burden of CECL compliance, participating in the process by:
- Providing basic information in a quick, point-and-click Q-factor questionnaire
- Meeting with the NXTsoft analyst to review and refine inputs and results as needed
Omnilytics CECL: The Best Solution for Community Bankers
NXTsoft developed Omnilytics CECL as a do-it-all software solution that takes the stress out of CECL implementation.
The benefits are clear:
- A complete solution and fully-validated model
- No complicated calculations
- Intuitive software
- Backed by our extensive regulatory experience
- Scalable solutions with optional upgrades are available
- Excellent value
Claim Your Free CECL Report Today!
NXTsoft is so confident that our CECL solution will exceed your expectations that we will provide you with a free CECL report today. Request your free report now to discover how Omnilytics CECL can be an excellent investment for your financial institution.
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