BEATING THE CECL DEADLINE – WITHOUT ANALYSIS PARALYSIS BY SHAWN O’BRIEN, PRESIDENT, QWICKRATE Af ter years of anticipating CECL, January 2023 is within sight. And the compliance deadline won’t be moving. For many banks, the biggest challenge is simply adopting an unfamiliar process for calculating reserves. Fortunately, regulators have made strides toward minimizing possible disruptions. In fact, they’ve addressed many concerns head-on. Where should banks start? Regulators believe a bank’s CECL solution should equal the sophistication of its loan portfolio. So they expect different banks to use different solutions to calculate reserves. For banks with fewer losses, overly engineered solutions add no value – one reason solutions based on call report data are popular. Process complexity can vary greatly among methodologies. When evaluating solutions, don’t mistake precision for accuracy. No current or past losses to work with? Future loss forecasts more often come from qualitative adjustments than from quantitative adjustments. Methodologies such as loss rate, remaining life, migration or vintages are less complicated but generally less precise. Likewise, other methodologies (i.e., probability of default, discounted cash flows) are more precise but more difficult to develop. Is it worth the extra work? Many banks say no, preferring to continue using their Q factors to support or defend CECL as they did for their ALLL reserve. Practical assistance is available Among the varying options for CECL compliance is a solution developed with community banks and their challenges in mind. QwickAnalytics® CECLSolver™ is easy to use, and getting started is simple. The tool utilizes a weighted average remaining maturity (WARM) focus to automatically display historical losses over WARM periods. This eliminates the need to compile past information, enabling quick, easy analysis of different loss scenarios. CECLSolver also displays loss histories of selected peer groups (UPBR/state/custom) for identical periods. We’ll help you with WARM calculations, whether they’re performed by your team (if data is available) or by ours. We expect that banks will continue to address qualitative factors. Regulatory statements regarding assessing the collectability of cash flows have caused many banks to stress – and there’s no need. We believe banks should continue to utilize qualitative adjustments currently conducted as part of their incurred loss calculation. They’ve been doing this successfully for years. Furthermore, you and your regulators are familiar with and believe in the process. As for the CECL “forecasting” element, bankers should focus on what might cause future portfolio losses and diminish their ability to collect on loans. Document and quantify your answers, again not mistaking precision for Endorsed Partner cbak.com 12 In Touch
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