Current Expected Credit Loss (CECL)

Understanding CECL

In the aftermath of the 2007-2008 global financial crisis, regulators turned stridently critical of the methods used to calculate the provision for loan losses, which had come up woefully short. Consequently, they announced new rules such as the International Financial Reporting Standards 9 (IFRS 9) and current expected credit loss (CECL) to determine appropriate levels of balance sheet reserves needed for such losses. We believe these regulations would have widespread, deep and long-lasting impact on the banking industry... Read more >

Impact Analysis

The current expected credit loss (CECL) model is being touted as the biggest accounting change of the current decade. It will have a big impact on the capital management of most financial firms, the overall impact will be felt on a much bigger scale within organizations. The exact magnitude can be gauged only at the time of implementation, but the broader impact can be assessed at an organisation-wide level... Read more >

Implementation

Implementing the current expected credit loss (CECL) model may seem challenging at first glance, but a structured approach can make the task easier. Any implementation would need changes at the enterprise level and approaches could vary from bank to bank depending on portfolio size and complexity...  Read more >

Challenges & Opportunities

As an organisation-wide change, current expected credit loss (CECL) poses significant implementation challenges for financial institutions, such as: classification changes, modelling changes and operational challenges...  Read more >

Industry Insights

The major players are wary about the impact of CECL on the banking industry. The ABA thinks that "...CECL poses a significant challenge for the banking industry. The life of loan loss concept presents complexities that can decrease capital, and add both volatility to allowance for loan and lease losses (ALLL) estimates, and additional costs. Further, it has the potential to change how banks do business."... Read more >

Data Analytics

Most banks are now moving towards a centralised repository of data. With regulations such as CECL, challenges on the data front become manifold - not only does granularity become a challenge, but also the size and amount, which may require rescaling of legacy IT infrastructure at banks. Systems and controls need strengthening, too, to ensure that data quality is consistent... Read more >

 

How CRISIL Can help

 

Data Analytics

 

With a resource pool of dedicated and experienced professionals CRISIL GR&A can help clients in preparing for the biggest challenge associated with CECL: data management. Our team of expert analysts can help clients in gathering data required for CECL models while also performing validation and analysis on the collected data and designing appropriate controls for proper governance. At the same time our technical expertise can be leveraged to assist in enhancement of overall data infrastructures, and data storage processes.

Models & Methodologies

 

After helping clients across the borders on diverse engagements in model development and validation through our global network of resources is now ready to provide recommendations on CECL models to the client. We apply our expertise and experience in allowance calculation and credit risk modelling as well as model validations. Our Quantitative Research team can help assess and leverage the existing models for CECL purposes after providing recommendations to calibrate or re-design the models. Our model risk management team also provides independent validation services to determine the compliance of models with CECL requirements.

Customised Support

 

As part of our commitment towards client satisfaction we do also provide our expertise in numerous other fields like risk management and capital calculation, accounting for loan losses and allowances, calculation of allowance on exotic portfolios, technical assistance and much more. We do also provide independent customized support in database design & management for CECL and model validation.

 

Insights