October 10, 2017 –
In 2008, new regulations have been introduced to ensure that banks can weather a severe economic downturn. Among them are the Comprehensive Capital Analysis (CCAR) and the Dodd-Frank Act Stress Test (DFAST), which serve to ensure banks have sound capital plans and can endure macro-economic stress scenarios.
In addition, the Financial Accounting Standards Board (FASB) has replaced the current “incurred loss” accounting model with an “expected loss” model. The financial crisis highlighted the significant shortcomings of delayed recognition of credit losses. Current Expected Credit Loss (CECL), the new FASB accounting model, requires banks to forecast and account for expected losses over the estimated life of the loan. This approach will be effective for SEC registrants’ 2020 financial statements and for non-SEC registrants’ 2021 financial statements. Early adoption is permitted beginning in 2019.
To reduce the compliance burden, banks are looking for ways to leverage synergies between CCAR, DFAST and CECL, and streamline their reporting. The difficulty is that data sets and assumptions underlying the loss forecasting methodologies are different: CCAR and DFAST modeling is based on loan data projections over a nine-quarter horizon, which include estimates of new loans being added and existing loans paid off. CECL is accounting oriented and based on one specific set of loans and data at point in time.
Can the annualized loss estimates and models used in DFAST and CCAR be used for assessing the lifetime expected losses required for CECL? Not directly because of the differences in methodology. However, a number of commonalities can be identified and used jointly for the three regulations.
Existing Stress testing CCAR PD and LGD models that are used at the very granular loan level can be augmented to look at loan groups or segments with similar characteristics, and calibrated to give some life-time ECL projections. Thru the Cycle (TTC) ratings and PDs that are used in Basel calculations can be converted to the Point-in-time PDs and used for CECL. Although not required, stress testing scenarios can be leveraged for CECL to give it more consistency.
The CECL implications for banks are significant as it presents a major change in how to calculate the allowance for loan losses. One implication is that financial institutions will need to store more data for a much longer period of time. Another, is financial institutions will need to integrate their systems and, enhance the quantitative capabilities, share the data across functions, increase automation, audit and controls with more reactivity and complex analytics.
As we stated earlier, there are some points of convergence that can be leveraged through an integrated approach. With the proper technology, banks can share some of these components and processes across functions, all the while managing efficiently the elements specific to each of the three regulations.
AxiomSL offers financial institutions our extensive experience and solutions to help satisfy complex and inter-related compliance requirements. Banks that already have granular data managed with AxiomSL’s platform and use our CCAR, DFAST solutions can use the same data for CECL requirements, hence reducing implementation costs and time to delivery. Those banks that are not already clients of AxiomSL, will discover that our platform provides three key benefits for the effective deployment of complex requirements: Direct data pulling from central sources to avoid data duplication and discrepancies; high frequency reporting insuring consistence between all reports produced and across time; and powerful analytics to understand the evolutions and come to trust reported data. *. In addition, our technology provides full data lineage throughout the entire process while accommodating differences in methodology and modeling approach. These benefits result directly from AxiomSL’s data driven platform key business features: data and process lineage, data enrichment, aggregation, automated workflow capabilities, analytics, reconciliation and validation enables banks to efficiently organize their data to meet CECL requirements. In fact, business executives can leverage their processes such as mapping their balance sheet, identifying common definitions and classifications of exposures, and creating a single set of data to be used for all three regulations. Further, with AxiomSL’s platform banks can consolidate and put process controls around data sourcing.
The challenge of complying with CCAR, DFAST and CECL is massive. AxiomSL’s state-of-the-art technology can clear out the compliance and reporting headaches to let you focus on your core business. For more information about AxiomSL click here.