Regulatory agencies issue updated CECL Q&A

In June 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard that introduces the current expected credit losses (CECL) methodology for estimating allowances for credit losses. The standard applies regardless of bank size, for institutions that file regulatory reports that conform to U.S. GAAP. While the standard does not go into effect until 2020 for SEC registrants, and 2021 for all other banks, its impacts are far-reaching. Financial institutions should be preparing now by better integrating accounting, data analysis and risk management functions.

To assist in understanding and preparing for CECL, regulatory agencies recently updated a previously-issued Q&A. A primary consideration is to determine if a financial institution that is not an SEC filer is a public business entity (PBE) as this determines their CECL effective date. Banks in this situation will meet at least one of these criteria, on an entity-by-entity basis:

  1. Not required but do file or furnish financial statements with the SEC
  2. Required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer
  3. Issued securities that are traded, listed, or quoted on an exchange or an OTC market
  4. Has one or more securities that are not subject to contractual restrictions on transfer, and is required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis

Also according to the updated Q&A:

  • Banks should not rely solely on past events to estimate expected credit losses; they should continue to include qualitative and quantitative information when implementing CECL.
  • Banks should identify, collect and maintain data relevant to estimating lifetime expected credit losses that align with each method they will use under CECL. While they may already possess much of the data covered under CECL, because, for example, it was collected for loan underwriting, it may not have been adequately retained to be used for overall analysis of portfolio risk.
  • Banks should be prepared for changes in areas other than data management, including credit decisions and risk management as they evolve due to more robust information analysis. While credit may slow initially, ultimately banks may benefit because they will be able to more closely align price with risk rather than on what competitors are doing.
  • Banks will not be required to obtain or reconstruct previous data that is not reasonably available and would require undue cost and effort.
  • The existing requirement that an institution must use the fair value of collateral for determining the allowance for credit losses for a collateral-dependent loan HFI will be maintained.

Click here to read the full, updated Q&A bulletin.

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