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Regulators preparing for CECL shift, even as they advise banks

Like their supervised institutions, bank regulators are grappling with the substantive changes that the new loss accounting standard poses — and are wasting no time in preparing for the 2020 effective date.

The FDIC, OCC and Federal Reserve are bringing their staffs up to speed with the new loss accounting standard at the same time as they are providing guidance to banks. The changes will go far beyond accounting-centric staffers and will impact many areas of the regulatory agencies, such as field examiners, accounting staff, credit risk management and capital planning experts. The rule, called the current expected credit loss model, or CECL, comes from the nongovernmental Financial Accounting Standards Board, not from the prudential banking regulators themselves; that puts them in the same situation as banks of interpreting the rule and adjusting for the change.

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Regulators have long-prepared for the change but are now in overdrive. CECL will require examiners to assess whether institutions have made future forecasts that are reasonable and supportable. It will also apply to held-to-maturity securities, the first time an allowance has applied to debt securities.

But the standard's impact will go well beyond the examination staff within an agency. CECL will influence internal risk management and supervision, any group that reviews new applications and internal research departments that issue statistical publications.

The biggest challenge for an agency like the OCC will be the conceptual shift from a historical loss model to a future-looking one, said Rusty Thompson, chief accountant for the OCC. The OCC assembled a CECL transition group to prepare and update education, training and outreach materials as well as an internal website with resources for examiners. The group is made up of representatives from areas such as commercial credit, retail credit risk, capital policy, bank supervision, legal, operational risk, market risk and accounting. The regulator also hosted a spring interagency accounting conference and a two-part webinar series for examiners.

"Given the effective date, we view it more as a marathon, not a sprint," he said. "At this stage of the game, we're trying to raise awareness and equip our examiners so they can help the banks we supervise as they begin their efforts."

The standard may also necessitate future changes to regulators' guidance. For instance, the FDIC has issued at least two policy guides about the allowance for loan and lease losses it may combine into one, according to a source familiar with the matter. Thompson said the OCC may also revisit its regulatory policies, handbooks and accounting advisory series. Regulators also expect to send out communications such as FAQs periodically updating banks on where they should be in their preparations; the FDIC just released one such FAQ.

At the same time regulators are training their staffs for the change, they are trying to assist their supervised banks preparing for implementation and potential increases to their allowances for loan and lease losses. Despite the overhaul, regulators maintain that institutions with straightforward loan books will not be required to buy accounting software. Banks already use a variety of accounting methods to evaluate different portfolios and assets; they will be allowed to continue using those models as long as they collect the relevant data needed to calculate expected lifetime losses. But regulators are also meeting with core processing vendors to discuss their abilities to capture data, and what changes they may need to make, Thompson said.

"Our consistent message has been all along that all banks don't need big models," he said. "The fact that you're shifting from an incurred to an expected [model] that allows different methods to estimate loans isn't a new challenge. It's a challenge we have today with the different size and complexities of the institution."

Thompson said the OCC is trying to leverage its existing expertise of evaluating loan books that use various accounting methods to prepare its examiners for the switch to CECL.

Under CECL, examiners will be expected to emphasize management's judgement and assumptions in the models and the underlying documentation and inputs and resist micromanaging bankers who have deep familiarity with their loan portfolios. There are also no benchmark expectations by which regulators expect an allowance to increase, Joanne Wakim, chief accountant at the Federal Reserve Board, said during an October Fed Supervisory Insight webinar. Wakim also said bank examiners will look for management teams to present implementation plans as the effective date draws near, indicating their readiness and documentation of their process.

The interagency group is assembling questions to answer in releases or supervisory guidance. Thompson encouraged OCC-regulated banks to send implementation questions to CECL@occ.treas.gov; some of those questions could appear in future FAQs issued up to the effective date.