Risk Management & Analytics: What’s really at stake with your institution’s CECL data?

What’s really at stake with your institution’s CECL data?

Since the Current Expected Credit Loss (CECL) standards were finalized in June 2016, one major area of concern among bank and credit union CECL teams and their CFOs has been that the new set of loan loss calculations will require extremely granular and high-quality data.

Part of the concern is based on what data has been captured and what data issues exist. The bigger concern, however, is that the new standards will almost certainly require financial institutions to increase their loan loss reserves – perhaps to a level as high as 2% or 2½% of assets, especially for loans with longer lives.

With this potentially large reserve increase in mind, the loan loss calculations will need to be as accurate as possible for an institution to avoid setting aside a higher than necessary reserve. Having loss estimates as accurate as possible will be based partly on the amount of institution-specific key data elements (KDEs) a bank or credit union has and the amount of general market data the institution needs to supplement its own KDEs.

The importance of KDEs is highlighted in a Situs white paper, CECL Data: Don’t Wait, Start Collecting Key Data Elements Now. The author of the paper is Jeff Prelle, managing director of analytics and head of risk modeling at MountainView Financial Solutions, a Situs company.

“For well-run institutions, using their own data should, at least potentially, lead to setting aside smaller reserves from a CECL perspective and increased production efficiency due to data-driven decision making,” Prelle said in the paper.

Prelle added that he believes the concern about the effect of significantly increased reserve levels upon CECL implementation is behind some of the answers CECL teams provided in MountainView’s CECL implementation progress surveys earlier this year. In answers to the credit union version of the survey, data was the greatest implementation challenge. In the bank version, data was the third-largest challenge (behind model development and model validation), but perhaps this ranking was due to many banks having CECL implementation dates earlier than credit unions and having already resolved some of their data problems.

Situs’ CECL KDEs white paper is available for download. The paper makes the case for exceptionally accurate KDEs and rigorous quality control on those KDEs.


FDIC chair: Risk has shifted from banks to mortgage servicers

One of the nation’s top bank regulators says the banking system is safe, but worries about risks at non-bank financial institutions, particularly mortgage servicers. The remarks from Federal Deposit Insurance Corp. Chair Jelena McWilliams come days after regulators freed the last “too big to fail” non-bank from extra regulation.

McWilliams told a banking conference Tuesday that post-crisis regulatory reform helped make the banking system safer but could have pushed risky activity to non-bank lenders. Those lenders, McWilliams feared, are not regulated by the FDIC or the other two banking regulators: the Federal Reserve and the Office of the Comptroller of the Currency.

“The question is: If we have reduced systemic risk in the banking sector, where did it go? It did not just disappear, it is not ether now,” McWilliams said.

McWilliams’s comments come as she and the rest of the Financial Stability Oversight Council, a committee of financial regulators, unanimously voted to strip Prudential Financial (PRU) of its “systemically important financial institution” title. In its report, the council said the largest life insurer in the U.S. is no longer a risk to financial stability because it has more liquidity than it used to and lacks the exposure to be of concern.

Read more: Yahoo Finance


Risky deals return to leveraged-buyout market

Four years after a government crackdown on the leveraged-buyout (LBO) market, risky loans are making a comeback — and few seem worried about it.

Nearly 13% of LBOs in the first nine months of 2018 were financed with debt equating to at least seven times the target company’s earnings before interest, taxes, depreciation and amortization, or Ebitda, according to S&P Global Market Intelligence’s LCD. That is more than double the level in all of last year and is on track to be the highest since 2014, when 13.5% of deals crossed that threshold and regulators began to crack down on leverage exceeding six times Ebitda.

In another sign of growing risk, the amount of cash private-equity firms are putting into buyouts is falling. Their average equity contribution was 39.6% in the first nine months, also the lowest since 2014.

In a typical LBO, a buyout firm acquires a company mainly with borrowed money, with a goal of selling it later at a profit. The jump in deals that carry extra amounts of debt comes amid a surging economy and generally buoyant financial markets, which have fueled risk appetite, and as Washington takes a less aggressive approach to regulating Wall Street.

Read more: Wall Street Journal


NAFCU pushing Congress for two-year RBC rule delay

The National Association of Federal Credit Unions (NAFCU) is pushing Congress to enact a two-year delay for the National Credit Union Administration’s (NCUA) Risk-Based Capital Rule, contending that the one-year delay adopted by the agency board last week is not long enough to address its concerns.

The NCUA board last week approved a final rule that delays the implementation of the Risk-Based Capital Rule from Jan. 1, 2019, to Jan. 1, 2020. The rule also increases the asset level for credit unions to be required to follow the rule from $100 million to $500 million.

NAFCU and Credit Union National Association (CUNA) supported the one-year delay as a good first step.

In a letter to the committees with jurisdiction over credit unions, Brad Thaler, NAFCU’s vice president of legislative affairs said that the one-year delay provides some immediate, short-term relief for credit unions.

Read more: Credit Union Times


Bank of Japan signals financial system able to withstand easing for now

The Bank of Japan (BOJ) said the financial system remains stable and growth in bank lending continues to support the economy, signaling it’s comfortable that lenders are coping with its record monetary easing program for now.

Banks “have maintained their active lending attitudes,” the central bank said in its semiannual financial system report on Monday. “The financial cycle has shown no signs of overheating as observed during the bubble period in the late 1980s.”

The publication has attracted closer-than-usual scrutiny among BOJ watchers for any signs that it may further adjust its policy to alleviate the impact of monetary easing on financial firms. While there was nothing to suggest that the BOJ will change its policy, the report indicates that it’s aware of longer-term risks to the banking system, former central bank official Nobuyasu Atago said.

“The report is suggesting that banks need to be cautious about the impacts of any potential economic downturn,” said Atago, now chief economist at Okasan Securities Group Inc. in Tokyo.

Read more: Bloomberg


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