Banks are grapplingwith how to prepare for CECL and looking to bank regulators for guidance, afact that was not missed by a panel of chief accountants for the threeprudential bank regulators.
The 2016 AICPA Bank& Savings Institutions conference was dominated by CECL, the acronym forthe current expected credit loss model, the monumental accounting shift whosefinal standard was released in summer 2016. CECL will change the way banksaccount for losses on assets such as loans and securities. For loans, bankswill move from an approach that books losses when they become likely to beincurred to one that books the expected lifetime of losses on the first day oforigination.
Below is a wrap ofsome of the highlights from remarks by the chief accountants of the FederalReserve, FDIC and OCC and their answers to submitted questions.
The role ofgovernance in CECL
CECL may focus on loan-level data, but management shouldbegin implementation at the top, with the governance and audit boardcommittees, said Joanne Wakim, chief accountant at the Federal Reserve Board.The Federal Reserve has placed a greater emphasis on expectations for stronggovernance and internal controls in its supervisory guidance, and thoseexpectations will become even more important as banks gear up for CECL.
At the board level, Wakim said the audit committee should evaluateand monitor CECL implementation plans, including challenging executives whenappropriate. And a bank should ensure it has proper policies, processes andcontrols in place that will support its management's judgements around new CECLconsiderations, such as the adjustment and reversion to historical forecasts,future conditions and forecasts and the selection of various loss methodologiesbanks can apply to different portfolios to come up with an allowance.
"All methods are available to management to decidewhether they will be utilized in the allowance," she said. "Thatrequires judgment and to make sure you're selecting the right ones for yourorganization, so policies, processes and documentation around those decisionswill be key."
Strong governance will support the judgments made prior toimplementation, but it will also be vital to defending and explaining anychanges made afterward. She said if a bank believes it needs to make changesafter CECL goes into effect, proper documentation, policies and procedures willgo "a long way" with examiners in explaining or supporting those judgments.Strong internal controls will also help address concerns around any credit dataor metrics that were not previously used to calculate the allowance but willnow flow through to the financial statement to support lifetime-loss estimates.
Changes to the callreport
CECL will require many changes across the banking industry,including an update to the call report, said Robert Storch, chief accountant atthe FDIC. He said the regulator has not yet determined what the changes will beand will still need to submit it for public comment, but that the forms willneed to be ready for banks at the earliest possible effective date of 2019 forearly adopters.
One change to the report may be an area for banks toindicate if they are filing under CECL. He said that line item may be necessarygiven the staggered effective date, as well as the possibility for some bankswhose fiscal year differs from the calendar year and may have one year wheresome quarters are calculated under the incurred-loss model and some within thesame year are reported under CECL.
Storch also said the call report may need a separate lineitem for allowances for the held-to-maturity securities portfolio and theheld-for-investment loan portfolio, both of which will flow into the allowance.
Implementation plansand examiners
Bank examiners may expect banks to have a CECLimplementation plan to share with them, Wakim said.
"At some point, examiners will be looking for aplan," she said. "The later we get and closer to implementation, ifthere's no plan, I would think that's a readiness issue. Examiners will likelybe making comments about your bank's readiness to implement the standard."
She later clarified that for the time being, she expectsexaminers to have "conversations" with supervised banks, rather thanusing enforcement tools such as a Matters Requiring Attention action or moreformal communications.
CECL and CCARforecasts
Wakim received multiple questions about the permissibilityof using the baseline Comprehensive Capital Analysis and Review forecasts forCECL projections as attendees highlighted the potential overlap between thestress-test modeling and lifetime-loss modeling.
Banks will need to select a forecast that they feel isrepresentative of their sense of the future, and may find the baseline CCARassumption to be a good starting point. CCAR is the annual stress test exercisethat tests the capital adequacy and proposed capital actions of the nation'slargest banks for nine quarters under several economic scenarios, including aseverely adverse economic scenario. Wakim said the base case in CCAR scenariopublished by the Federal Reserve Board is an amalgamation of public forecasts,rather than internally generated forecasts, and are not the scenarios used bythe Federal Open Market Committee in their meetings.
"The underlying philosophy is that the Fed uses publicmarket consensus for CCAR, so it could be a logical place to go for aforecast," she said. "But the base case of CCAR is not a safe harborfor your choice of some public market consensus."