Pub. 11 2021-2022 Issue 3-1

coloradobankers.org 16 Should Institutions Build or Buy a CECL Solution? By Kylee Wooten, Media Relations Manager, Abrigo R egardless of whether financial institutions choose to stay in-house or outsource their CECL solution, they have four important considerations to make. Takeaway 1 Institutions complying with CECL in 2023 must make their build or buy decision quickly. Takeaway 2 Institutions will need to ensure their CECL solution has adequate data and can easily assess different methodologies. Takeaway 3 CECL solutions should support “reasonable and supportable” forecasts with transparency and auditability. Preparing for CECL Time is Ticking for 2023 Adopters Time is ticking for institutions that must comply with the current expected credit loss (CECL) by January 2023. SEC registrants that have already adopted CECL and other experts have repeatedly advised banks and credit unions to immediately begin their CECL implementation . Despite the warnings and the impending deadline, many financial institutions are at a standing start. During Abrigo’s recent CECL Kickstart , an event aimed at those institutions who are only now getting to work on this major accounting change, attendees were polled on their current implementation status. Overwhelmingly, most respondents (42.1%) reported that they were at a standing start. Meanwhile, less than 3% of attendees reported being finished with implementation. Some financial institutions may be at a standstill as they build their own CECL model using spreadsheets or buy a solution through a third- party vendor. CECL requires more inputs, assumptions, analysis, and documentation, and institutions must decide how to efficiently – and accurately – take each piece into account. This can require an extensive amount of resources that many financial institutions may not have, making the option to automate and modernize the process significantly more attractive for busy banks and credit unions. Regardless of whether financial institutions choose to stay in-house or outsource their CECL solution, they have four important considerations: Making Key Decisions Ensuring Adequate Data and Selecting the Right Methodology 1. Data An institution’s ability to calculate lifetime loss rates is predicated on the accuracy and availability of loan- level data. But having large amounts of data isn’t always enough. Many institutions lack the material loss data needed under CECL. Because of the important role data plays in calculating CECL, some financial institutions will find that partnering with a vendor can significantly help streamline the data-gathering process and identify and fill gaps in their data. If an institution considers leveraging a third party to assist with data, understand what the vendor offers for data archive, data architecture, and data adequacy services and how that compares to