Pub. 11 2021 Issue 3

23 PUB. 11 2021 ISSUE 3 How will CECL impact my institution? Adopting the new standard will influence internal controls and information likely not previously integrated into financial reporting efforts. In other words, the scope of CECL is far- reaching — spanning corporate governance, modeling, credit analysis, technology and others. Additionally, CECL affects all entities holding loans, debt securities, trade receivables and off- balance-sheet credit exposures. In short, it will have significant implications for operations at most financial institutions. How to proceed toward CECL transition The time to get started — if you have not already — is now. This is a significant change with extensive effects and potential risks. Careful — and early — planning is critical. Here are nine key steps institutions can take to take to achieve CECL compliance: 1. Identify functional areas (such as lending, credit review, audit, management, and board) that need to participate in the transition project/implementation and ensure those working in these areas are familiar with the new standard 2. Determine your effective date and whether to adopt early 3. Make a project plan and timeline 4. Discuss the plan and progress with all stakeholders as well as your regulator 5. Determine the ACL estimation method/methods that may be used 6. Identify available data and any other data that may be needed 7. I dentify potential system changes 8. Evaluate and plan for the potential impact on regulatory capital 9. Have a straightforward, well-understood process Finally, it’s necessary to take a holistic view to ensure a smooth transition, including: • Built-in testing for data integrity and method estimation validation • Update other bank policies and reports so they are consistent with processes • Consider running parallel with the ALLL to evaluate risks • Back-test as par t of suppor t ing modif icat ions and improvements What are the implementation timelines? This standard was effective for many institutions by Dec. 2019, and all others will need to comply by March 2023. These dates are based on the Public Business Entity (PBE) status for institutions. Early adoption was allowed for any institution after Dec. 2018. w Differences between the previous and the new standards Previous New Loans/leases (could be other valuation reserves) All debt instruments carried at amortized cost (not those at fair value like AFS securities) Does not apply to HTM investments Applies to HTM investments Threshold = probable loss Threshold = expected loss Reporting period focused (“incurred”) Reporting period + forecast (“life of the asset”) Individual assets (specific reserves) + pools at historical loss Pools of assets with similar risk characteristics + historical loss adjusted for reasonable/ supportable forecast period Quantitative (data-driven) and qualitative (Q-factors) Shifts focus to qualitative (adjustments based on reasonable forecasts) + quantitative Contact us for a complimentary and confidential risk management consultation. RMSG is a wholly-owned subsidiary of Bankers Healthcare Group. To learn more about RMSG, visit riskmsg.com .