LEARNING LESSONS FROM CECL IMPLEMENTATIONS
Welcome to the third CECL Express e-book!
2022 was a year of systemic design, decision making and testing for America’s community banks and credit unions. Now that CECL is finally here, the chosen approaches will be road tested through audits and bank exams.
The context is important. CECL was first mooted as the US based response to a lack of systemic liquidity during the 2008 financial crisis. The details took a number of years to work out, during which, the ‘rest of the world’ version, IFRS-9, was created and implemented. Ultimately, the roll out has taken as long as the initial design, with the smaller banks and credit unions being the last cohort to go live.
The lengthy implementation period was largely because the experienced roll out in the larger banks showed that there were nuances and complexities that would mean smaller firms would need an additional two years to get it right. This is worth considering. CECL is asking banks to perform reasonably advanced credit risk analysis on their loan books, regardless of experienced losses or knowledge of their borrowers.
At CECL Express, the design principle has always been to provide the tools and systems that are commonplace in large banks, to the wider market of credit unions and community banks. There is more to CECL than just implementing a system, though, and this series of articles looks to explore the range of options and decisions in front of these institutions. This covers model options, stress testing, liquidity needs and system design best practices.
We hope that these discussional pieces are useful in making sense of CECL as a philosophical concept, as much as an accounting principle.