A pending new requirement for how to reflect loan losses in financial statements is beginning to affect how banks do business, according to a recent poll.
The Global Association of Risk Professionals and analytics firm SAS surveyed 130 senior and mid-level executives at 98 lending organizations and learned the business model is shifting in a number of ways as they digest the implications of new accounting rules. Plans are changing not only with respect to IT systems and infrastructure but even in areas like product offerings and loan pricing strategies.
All public companies must comply with Accounting Standards Codification Topic 326 beginning in 2020, with financial institutions most heavily affected by the new approach to recognizing loan losses. The standard requires entities to estimate future loan losses following a “current expected credit loss” model, which mandates a day-one recognition of some expected future loss, even for instruments that are fully performing.
The CECL model for recognizing credit impairments is causing entities to reconsider a number of ways they do business, the survey revealed. Banking regulators have already indicated they're considering how to regulate capital requirements in the post-CECL phase.
In terms of technology, 65 percent said they are taking CECL into account in mapping out IT strategies. Many said their current infrastructure is not adequate to meet the new accounting, which will require companies to leverage both historic data and future projections based on both their own experience and market conditions, to determine the day-one loss allowance.
In terms of the business itself, 37 percent said the pending transition to a CECL method of reflecting loan losses is causing their institutions to reconsider their product offerings, and 39 percent said it is affecting how the entity approaches its strategy with respect to loan pricing.
Calendar-year-end companies will begin reflecting the CECL method in their first-quarter financial reports in 2020. Nearly 40 percent of entities in the poll indicated they want to have their CECL method accounting ready to run parallel with the current accounting for at least a year before they must begin reporting. That suggests they need to have their implementation efforts completed by the end of 2018.
Yet, the survey also suggests that will be a challenge in itself, with 43 percent indicating they still sense some discomfort in their organizations with data availability and data quality. Many also expressed concerns regarding lifetime loss modeling and the production process. While 94 percent of respondents said they use spreadsheets to execute their current loan loss allowance process, 44 percent said they plan to migrate to some kind of discounted cash flow approach to comply with CECL.