The CommunityBanker 6 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. After years of anticipating current expected credit losses (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 Beating the CECL Deadline — By Shawn O’Brien, President, QwickRate® Without Analysis Paralysis
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