The Financial Accounting Standards Board had its board meeting in February, focusing on Current Expected Credit Losses (CECL) requirements. An important message from the meeting: the Board did not defer the January 1, 2023, effective date of CECL for non-public entities. That means time is running out.
Most community banks are following the American Institute of Certified Public Accountants’ recommendations and are making sure they’re ready for January 2023 by taking the time to run parallel CECL systems. PCBB has uncovered three guiding principles and some pointers to help your institution stay on track as you perform your parallel runs.
A parallel run requires extra effort, because it compels bankers to assemble resources, but it’s a good way to make sure that your institution is genuinely prepared to operate under CECL. After all, it’s important to think through all the eventualities. It’s better to take the time for two or more dry runs that cover what you need when you go live, such as additional data, adjusted Q Factors, your procedures, documentation, etc. Through these parallel runs, you may find related issues that your planning didn’t reveal.
1. Don’t let the parallel process run on autopilot.
Running in parallel is a time to make sure things are running as they should. Executives need to stay hands-on, ensuring that the bank has necessary processes in place, including ongoing assumption documentation. You will most likely need to adjust your assumptions. Downstream changes are likely to affect both your model and your documentation, so plan to share these with examiners as well.
Below are four categories that should be addressed to keep things running smoothly, while giving you vital feedback to incorporate into the model.
- Accessing and deploying resources. Who will build and run your parallel CECL process? Will the effort involve vendors? Identify your team, whether internal or external.
- Using the appropriate technical functions. Determine how you’ll select a modeling approach — as well as your resources — and schedule for conducting system integration testing and user acceptance testing. Plan to run quality assurance testing throughout the parallel run. You’re essentially testing the functionality you’ll need for processing the allowance for credit losses and related disclosures.
- Setting up operations. With technical issues resolved, you’ll move to following the target operating model design sequence, with the goal of producing an allowance for credit losses and external quantitative reporting disclosures.
- Defining the process for approving credit-loss allowances. Run this process for two to four quarters with your credit-losses approval committee. Take a very close look at what the committee believes caused allowance changes between one period to the next, as well as consider the qualitative overlays included in the credit-loss allowance.
2. Talk with auditors and your regulatory agencies.
Get their early feedback and support for your CECL assumptions. Your chosen model should be in harmony with your projected growth, as well as in line with whatever strategic initiatives you’ve planned for 2022. Auditors and regulators may see your situation as more or less complex in light of even small changes to your growth or strategy. Be prepared by getting this input early before it is too late to make any adjustments.
3. Let the data guide you.
Make sure you pick the right supplemental data and let that data guide you. Some vendors offer supplemental data in their models, which needs to be reliable, consistent and relevant to your institution’s situation. Once you’ve chosen your data, pay attention and respond accordingly. Don’t needlessly overcomplicate your compliance process — but be diligent.
Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management, international services, lending solutions and risk management advisory services. PCBB has helped many community bank customers implement CECL and run in parallel. Contact Jay Kenney at [email protected] for more information.