3 common myths about CECL
'Bad data equals bad decisions,' data expert says.
Although the Financial Services Accounting Board adopted its current expected credit losses (CECL) standard in 2016, confusion still exists about the new standard, says Dan Price, CEO of 2020 Analytics, a CUNA Strategic Services alliance provider.
CECL uses an “expected loss” measurement for the recognition of credit losses, explains Price, addressing a CUNA Councils Virtual Roundtable, “Using CECL to Create a Culture of Analytics.”
He cites three common myths about CECL implementation:
1. It will destroy my provision expense.
CECL implementation targets retained earnings, not provision expenses. All else equal, your provision expense would never change throughout the implementation of CECL.
2. CECL will destroy my capital position.
While implementation of CECL will likely lower credit unions’ net worth, it will not affect the measurement under the NCUA’s risk-based capital rule that becomes effective in December 2019.
Under this new rule, the entire allowance balance will be reflected in capital for purposes of the new risk-based capital calculation.
3. I should build up my allowance for loan and lease losses.
This is a big myth, Price says. Institutions must continue to use the existing U.S. generally accepted accounting principles (GAAP) incurred loss methodology until CECL becomes effective.
It is not appropriate to begin increasing allowance levels beyond those appropriate under existing U.S. GAAP in advance of CECL’s effective date.
He advises credit unions to take action in advance of CECL implementation:
- Streamline your data acquisition process. Make it easy.
- Know your data. “Bad data equals bad decisions,” Price says.
- Use your data and take action. Start with what seems most logical.
- Test for performance. Update your models continuously to improve performance.