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CECL will have the most significant impact on American banking since the Dodd-Frank Act was adopted. Models currently being developed indicate that bank profitability—and bank department profitability—will be affected as institutions charge for credit loss provisions on new loans and credit downgrades on existing loans.
Regulators and auditors require both IFRS 9 and CECL institutions to regularly validate their credit loss estimates, and benchmarking is an integral part of that validation process. To avoid becoming an outlier, benchmark current expected credit losses now. Doing so ensures that your bank will not need to adjust later, as the methods and calibrations of other banks gradually come to light.
Banks preparing for CECL implementation in 2020 or 2021 can learn from the experience of banks already implementing IFRS 9. Global Credit Data conducted a IFRS 9 benchmarking study in the last quarter of 2017 that found significant variation in the credit loss estimates of the 19 participating IFRS 9 banks—all of which used a well-defined hypothetical portfolio and a common scenario to calculate their expected credit losses (ECL).
Variability is baked into the forecasting process as modelers choose among methodologies for the general framework as well as its individual components. Since the models contain a high level of uncertainty, high variability between banks is to be expected. Little overall market insight currently exists regarding how the different modeling approaches, data sources and assumptions affect the final ECL number.
As institutions develop more precise methods to improve future credit loss estimates, we can expect that regulators and auditors will focus on differences and push for greater consistency. Benchmarking your calculations now will surely enhance your institution’s credit loss forecasts going forward.
GCD will be working with Accenture and the IIF to help U.S. financial institutions benchmark their CECL models as they are developed. GCD will conduct deep methodological and calibration surveys and benchmarking studies in 2018. Institutions that would like to participate in the CECL work should contact Steve Bennett.