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CECL requirements create new complexities for banks


Banks and credit unions need to navigate interconnected and complex risk, and that difficult task is made even more challenging by the rising disruption from nonbank competitors and compressed margins.

The complexity of the Current Expected Credit Loss (CECL) standard significantly alters the availability of credit insights. It upsets established approaches to loan pricing, portfolio management and capital optimization. Credit executives must use insights from CECL to guide their organizations’ transformation for long-term profitable growth.

No two banks have the same starting point, but the guiding principles of top-performing banks offer a universal template. These banks approach transformation by emphasizing:

  • A consistent view of risk: Aligning their targeting, pricing, reserving and portfolio management activities
  • Enhanced customer experience: Engaging customers digitally as individuals with ready access to the bank’s full product suite
  • Iterative development: Rapidly delivering value, responding to changing conditions and deploying highly visible capabilities to maintain momentum and lower risk

The process begins with a gap assessment of current capabilities. Identified gaps are prioritized and addressed using a series of small-scale projects. This process enables transformation across multiple budget cycles, as well as project momentum that can maintain stakeholder engagement. After this framework is established, iterative development and gap assessment continue as a cycle to keep priorities aligned.

Gap assessment and prioritization should reflect a full view of the credit lifecycle, emphasizing key lifecycle stages for profitable growth that include digital integration, quantitative risk ratings, underwriting for stress scenarios and capital optimization.

Cultural change to enable transformation

Transformation affects many stakeholders, and success is more than mining the right data or investing in the best tools. Enabling the journey depends on engaging multiple disciplines in setting and implementing your transformative vision.

Begin by orienting your cost centers to a profitability narrative that allows compliance and sales to rethink processes using a customer perspective. Through interdisciplinary engagement, risk insights can serve multiple bank processes and actively support an enhanced customer experience.

For example, numerous organizations are applying data and analytics designed for Know Your Customer (KYC) compliance to transform customer targeting and onboarding. This same data can give sales teams a fuller picture of the client for cross-sales and to prevent extended interactions with customers who don’t meet compliance criteria.

Next, connect the goals of your transformation to your corporate objectives. Your project roadmap translates the gap assessment results and strategic goals of the C-suite into actionable objectives for tactical resources. This alignment ensures senior-level buy-in and budget allocation for transformation across multiple budget cycles.

Finally, empower transformation champions with an iterative vision. As new capabilities are deployed, help the people affected see the value the development offers not just to them, but also to the larger organization and to customers. Quick wins maintain momentum—make sure that your champions can see how each step fits into the long-term vision for transformation.

Guiding principles in action

The journey of a specialty finance company illustrates this multiyear transformation approach and the impact of a consistent view of risk. Its credit risk team needed quantitative risk ratings for enhanced portfolio insight and regulatory compliance. To align stakeholders, it explored ways risk ratings could be used to improve processes across the credit lifecycle to enhance customer experience.

The new approach revolutionized the conversation between sales and underwriting. Sales teams used the quantitative risk ratings to focus on deals with a higher probability of success. Underwriters were redirected to riskier deals or deals with challenging circumstances where their expertise added value to the customer relationship.

The same risk ratings were also used to create a risk-based portfolio management process and the firm’s CECL estimate. Redirecting these resources based on risk enhanced the effectiveness of the monitoring activities and produced significant savings by scaling the resources applied to low-risk customers.

The next stage of this company’s journey is focused on automating data gathering to support the risk rating models for more speed to decision, embedding KYC checks and data in customer onboarding, and automating covenant monitoring to enhance portfolio management.

With the guiding principles of top-performing banks, a thoughtful approach to the credit lifecycle and the right organizational culture, your bank’s transformation journey will be successful. Credit executives are uniquely positioned to offer the vision to focus investment, and they have a key opportunity to lead a strategic response to meet the CECL standard.

Chris Stanley is a senior director at Moody’s Analytics.

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