With implementation dates for CECL perhaps a year or more in the future I had a banker ask me recently when I would suggest they start down the CECL roll out runway. He was surprised when I told him “Now”.
I recommend starting right away for the following reasons:
1) Determine the day one CECL financial impact to your allowance.
One of the biggest unknowns is how much your allowance might grow under CECL’s expected loss perspective. Putting a number on your exposure earlier rather than later is a smart plan.
2) Plenty of time to work through all the various "what-if" scenarios.
There are lots of moving parts with CECL. And that means opportunities to optimize your CECL approach. You can’t expect to get it all right the first time through. Practice makes perfect.
3) Need to run parallel for multiple periods.
Any time you have a significant change like CECL it’s just good risk management to run parallel for an extended period of time. Seasonality or changes in the business environment could well impact your results. Better to find out now rather than be surprised later.
4) Develop CECL policies, procedures, and training requirements.
You can’t “wing it” with a change like CECL. It needs to be locked down, just like every other critical process in the bank. The catch is that unless you start actually running CECL you won’t be able to lay out the details to document your process.
5) Important to get the Board of Directors involved early in the discussion/process.
Management is responsible for determining and documenting appropriate and reasonable assumptions surrounding expected losses and reserves in compliance with Board policies and regulatory requirements. The Board needs time to be educated, to discuss, investigate and fully evaluate its options.
6) Examiners will inquire about CECL prep well in advance.
We see this happening now. Financial institutions are increasingly being prodded on CECL by their examiners. Will you be ready when your examiner asks about your CECL plans?
Starting now also allows the financial institution to determine strategies to offset CECL impacts (such as shorter finals, unconditional rights to cancel, etc.) before they're needed.
CECL is a big change. Let us know how we can help you smooth your transition away from legacy ALLL to CECL.
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