Fintech Insights

Tick tock, the CECL clock!

John Thuma | Data Solutions Group, FIS

January 13, 2020

I went to bed like any other night, but this was going to be different. Instead of peaceful slumber, I awoke suddenly in a cold sweat! I was having a nightmare. As lucidity crept back into my mind, I suddenly recalled the bits and pieces of the torment. Relief overwhelmed me as I realized it wasn’t real. CECL fears can be much like other nightmares, such as being unprepared for an exam, or being chased through the dark forest by a frightening ghoul. Some of us even have nightmares while we are wide awake. If you are in the banking business, CECL nightmares might bring you such anxiety. Why is CECL so terrifying? Does it have to be? Let’s explore some of these fears and get you ready for your CECL journey. Finally, fear not… Keep reading and learn more about how FIS might tame some of the anxiety!

What is the CECL?

Tic-toc the CECL clock is looming. CECL is an acronym for “Current Expected Credit Losses.” It is a regulation requiring financial institutions to estimate its expected credit losses throughout the life of its entire portfolio. Until now, all financial institutions (FI’s) had to worry about were today’s loan losses. Now they must worry about the lifetime of their loan portfolios. Those expected losses are recognized the day the asset is booked. Of course, there is much more to it than this, but the CECL fear is real. For publicly traded banks, the regulation goes into force in 2020, and 2023 for privately held institutions.

Does it have to be scary?

JPMC Chairman and CEO, Jamie Dimon states that “an accounting standard change (CECL) set to go live in early 2020 will be detrimental for small banks.” The burning business question for small and mid-sized financial institutions is: how will small banks be able to maintain the capital to reserve against the loans they make? It’s also scary considering the technical factors. When we think of CECL we think about consolidating data from disconnected datasets. With data there are very few things that are more expensive than data preparation. With CECL we must also consider high-priced systems, software, and data science. For many small institutions these costs are staggering and downright scary. CECL can be a terrifying abyss! Fear not and keep reading.

What doesn’t kill you makes you stronger

A recent survey of financial professionals found that 79.8% expect increased complexity for compliance and an equal number cite an increased strain in internal resources in their move to CECL. Sounds like a nightmare, but does it have to be? Can there be a silver lining to CECL? Will banks be forced to understand their risks better? Can CECL prepare our FI’s for economic downturns and other variables impacting long term viability? The American Banker stated: “If CECL had been in place, say, at the end of 2004, the housing bubble would not have grown as large, and the housing bust would not have been as cataclysmic. And if CECL had been in place at the end of 2009 as the crisis was winding down, the subsequent credit crunch would have been less severe.”

Does it have to be a nightmare?

How much is CECL going to cost? What if we had a solution that automatically consolidated your loans from a variety of business channels and data sources? What if we could take some of the data integration costs out of the solution and provide an easy to use interface for banking experts, not data scientists? We are working on a solution that won’t require an army of people and mad scientists. CECL doesn’t have to be a nightmare after all. Sweet dreams everyone!