Beating the CECL clock and crowded field: The competitive edge in regulation
With a sound not unlike this—“CECL, CECL, CECL”—the clock is ticking for banks to comply with the Current Expected Credit Loss standard.
Waiting until the last minute is no option at all, given the unprecedented changes afoot. CECL represents one of the largest revamps in history to bank accounting. There’s no denying it’s a burden for many bankers.
But much like government mandates on seat belts, vaccines and education, CECL implementation comes with benefits, even if they may not appear so obvious. While the regulation represents a response to the 2008 financial crisis—and meant to ensure financial institutions better prepare for credit losses—banks that embrace CECL will reduce siloes, better understand their clients and more effectively price products, experts say.
“If all you want to do is comply, you’re probably not going to end up in any better position than you are today,” says Hans Pettit, partner at the accounting firm of Horne LLP. “But while many banks don’t see it, there’s tremendous opportunity in CECL.”
CECL takes effect in 2020 for SEC registrants. It takes effect March 31, 2020 for public business entities (PBEs) that file with the SEC; March 31, 2021 for other PBEs; and Dec. 31, 2021 for non-PBEs, according to the FDIC.
While some banks are taking a breather and just hoping it will go away, those who move forward now will land a competitive advantage in the future, says Peter Cherpack, executive vice president, senior director of credit technology and partner at Ardmore Banking Advisors. Cherpack told BAI last year that those banks that embrace CECL will emerge as winners. And because a longer data set means more information to work with, banks that start sooner will gain even more of an edge.
Fewer siloes, more institutional knowledge
Whereas banks previously measured loan risk based on one-year losses under the General Accepted Accounting Principles (GAAP), CECL requires them to look at the full life of loans, then set aside reserves at the time of origination to cover losses. Since so many departments must come together for CECL, adoption inadvertently forces banks to knock down traditional organizational siloes, says Jeff Prelle, managing director and head of risk modeling and validation consulting for MountainView Financial Services.
As CECL requires banks to work with model development, treasury and regulation reporting, departments must emerge from their cocoons and talk to one another.
“Anytime you get siloed you’re only focusing on your expertise,” Prelle says. “But exposing parts of the organization to each other really helps build the knowledge base and equity in your firm.”
Cherpack has already seen CECL-related benefits at some banks. Many have created synergies within departments that encourage talk about common issues: an initially soft benefit that can create a big impact over time.
“Everyone in the bank has to come together for the common cause of CECL and the byproducts are sharing information and good communication throughout the institution,” he says.
Yes to know customers
Banks typically use surveys, word of mouth and industry trends to guide new product and service development. But if few have had a strong pulse on who their customers, banks could find new avenues for personalization and customized offerings through unearthed CECL data.
“You need to know what is affecting them,” Prelle says. Via CECL data, “You can learn more about what they need, what regional effects may be happening. Many banks don’t use data to really understand their customers.”
Early adopters already leverage CECL data in strategic fashion to focus business efforts and understand their customers. Prelle said in a white paper that banks approaching CECL strategically can find themselves better positioned to efficiently address evolving regulatory demands, minimize business risks and foster enterprise-wide, cross-functional alignment.
Most importantly, clean, crisp data enables banks to better serve their customers. Big institutions such as JPMorgan Chase and Wells Fargo have already demonstrated the strong competitive value in an intelligence-driven strategy, Petite says.
But even smaller banks can learn a lot just by collecting and analyzing more customer data.
“The ones getting more out of it are the ones that tend to be innovative. They embrace technology and data,” Pettit says.
Better loan pricing, besting the competition
At the bare minimum, CECL can help banks identify the credit expense for each loan, says Adam Mustafa, CEO and co-founder of Invictus Group. But to expand and combine that with stress testing to pinpoint capital allocation enables banks to develop a more effective loan pricing system. “The main goal as far as we’re concerned isn’t just compliance,” Mustafa says. “It’s unlocking strategic value, and having that loan level data can really drive that.”
Cherpack noted in his white paper that having accurate, robust data for credit portfolio information can increase efficiency, reduce risk and justify a business strategy of growth. This can enable a bank to discover a competitive advantage over “risker, less efficient bank competitors,” he says.
While most banks know the importance of data, few have established a framework to identify, gather and analyze what they need, Pettit notes. CECL forces them to accelerate the process so they can better see the relationships between customers and lending products—and improve their decision-making. Such intelligence can offer a strong long-term return on investment, especially for those who look at it as an opportunity and are willing to go beyond the bare minimum.
“Those banks that set out on a course to integrate those processes and make the most of CECL are the banks that three, four or five years from now are going to have a significant competitive advantage,” he predicts.
Which is just the kind of positive time frame banks like—especially compared to annoying ticks.
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