Time for CECL parallel runs
Financial institutions across the U.S. have been planning for the Current Expected Credit Loss (CECL) accounting standard for several years now. The effective goal of a parallel run is to make sure that the institution is ready to review, calculate, and report on their CECL allowance for credit losses in 2023. This CECL result needs to satisfy the expectations of management, external auditors, and regulators. Defining the objectives of the parallel run needs to be done early in the project planning phase.
Data preparation, loan pooling, and model validation are just some of the procedures that need to be put into place as we move to a forward-looking credit loss estimation standard. Most institutions plan to execute a parallel run for the CECL process — understanding the right way to do this will go a long way in laying the groundwork.
The guiding principles that should define a parallel run are as follows:
- The 'business as usual' (BAU) process would run in tandem with the parallel run, and the resources needed for it have to be allocated accordingly.
- It is best practice to have at least two complete parallel run cycles that include governance, financial reporting, investor communications, and the external auditor.
- The parallel run and surrounding processes can be divided into stages: Setting up a system, Refining and plugging data gaps, Initial results, Parallel run, and Go Live.
Data preparation and readiness are crucial for each bank and credit union. Multiple models are used to calculate the required accounting provision under CECL, and each needs a comprehensive set of data:
- External peer-group losses from the FFIEC or NCUA
- Bank losses including any credit losses during previous reporting periods
- Yield curves used for calculating discounting cash flows
Working backward from the CECL 'go live' phase, important choices regarding the CECL solution set-up must be made. Various data options must be assessed, and a number of models selected. The requirements include:
- Computation requirements
- Data identification, cleansing, and storage
- Model audit needs
Reporting then needs to be developed that can provide enough information to a bank's audit team to show that ECL calculations are based on relevant inputs and methods. This should include:
- Macro-economic scenario factors
- Market data and credit loss curves
- Obligor behavior scenarios (pre-payment speeds)
- Peer group losses
- Qualitative adjustments to reflect local factors
A 'full dress' parallel run will ensure a smooth transition to the new standard. To prepare for audits, reports and dashboards need to allow auditors to:
- See the results by pool
- Analyze the data that has contributed to these results
- View the overall result at a granular level (loan by loan)
The final stage is where the parallel run is executed and the system needs to operate as if it were live. It has to provide meaningful results without too much intervention. For financial institutions, being prepared by executing a comprehensive parallel run process should be well worth the effort.
CECL Express can help…
CECL Express is a turnkey solution that fully satisfies all elements of the new CECL accounting standard. The system provides all non-loan data, including:
- Yield curves and Fed data
- Linked reports on losses from the FFIEC and NCUA
- PD and LGD curves
- Macroeconomic data
Banks and credit unions need to only provide the underlying loan details for the system to provide fully auditable ECL results for multiple calculation methods, including:
- Vintage
- Roll Rate
- Discounted Cashflow
- WARM
- PD/LGD
CECL Express provides more than valid ECL results. The system computes results for all methods and all loan pools, allowing the bank to optimize its CECL configuration and avoid the worst impacts of the new standard.