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“CECL is an effort in futility that won’t help banks, regulators, or consumers” —McCall Wilson, Bank of Fayette County maintain any credit-related information on a lifetime basis, according to Gullette. He points out: • Origination dates are rarely maintained more than three years. • Charge-off rates are normally based on annual data, not lifetime, even for large banks. That must change. For example, banks normally track classified loan loss percentages only over the next year. It’s the same for delinquencies. Even large banks that have probabilities of default compute them over one year, not a lifetime. Formulating the percentages on a lifetime basis is very data intensive. • Key underwriting drivers like FICO have never been analyzed over a lifetime at most institutions. • Banks will need to collect data to give a basis regarding how their forecast assumptions will impact future chargeoffs over a lifetime. Gullette says it won’t be difficult for banks to meet the deadline or get past the first audit. He believes banks may 24

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run into difficulties after the second or third audits, when credit conditions have changed. That’s why he believes that banks won’t know if their transitions to CECL are successful by the implementation date. “This is about how banks will manage capital and view credit risk,” he says. Success will be demonstrated when a bank can back up why its allowance should be 50 or 100 basis points higher.

investor benefitS? When asked if CECL will provide more useful information to stakeholders, Gullette and Zmiewski say, “It depends.” Gullette says new disclosures about the loan portfolio may result in new questions: “It’s opening up a black box, and now, all of a sudden, people will see what you are doing about this or doing about that. Transparency is a good thing.” Zmiewski says the bank’s accountants and regulators have always had an in-depth look into banks’ books, and CECL will not provide them with more

December 2016/January 2017

information. But investors may f ind better quality information disclosed in financial statement footnotes. “In this sense,” he says, “there is an opportunity for banks to tell a good story about their risk management capabilities and how they have translated it into performance.”

portfolio Ups, downs Ideally, A LLL isn’t just about keeping auditors, regulators, and investors happy, but about running the bank well. Portfolio volatility could impact a bank’s credit loss forecast, and many banks are not sure whether or not the CECL analysis will provide a better fix on what their risk is, explains Gullette. Institutions are concerned about explaining volatility to the aforementioned parties. Zmiewski isn’t as concerned. “The biggest change will obviously come at the point of transition in either 2019 or 2020,” he says. “By all forecasts, ‘the number’ will be bigger. Perhaps for a few quarters after that there may be some movement as the process evolves and refinements are made, but in terms of random volatility, I don’t think there will be much. Unless your bank has radically changed its risk appetite—and thus its risk profile—or has grown significantly through


December 2016 January 2017 Banking Exchange