An Interview with PrismPremier CECL 360 Project Leader Asaad Faquir
It’s no secret: The FASB’s CECL model is causing anxiety among financial institutions in the U.S. One major reason? Data liquidity. PrismPremier CECL 360 Project Leader Asaad Faquir explains the data liquidity issue and why it is a concern for CECL.
Is Your Data Ready?
Calculating losses under the CECL model will now need to be driven by loan-specific information or “loan-level” data. Banks will use this information to begin to predict and estimate an allowance for future credit losses on every loan over its lifetime. Presently, a financial institution determines its reserve based on actual losses incurred within a historical back window, adjusting for qualitative factors and risk changes. However, with CECL, the accounting for the estimated reserve will be based on the use of both historical loan loss data, as well as a prediction of the loss that is expected to occur in the future over the lifetime of a loan. This change in calculation philosophy means that financial institutions will now need to set aside capital for future loss events that could occur — even though they have not yet been incurred. The bottom line: getting the right data set to make your predictions for future expected losses is critical.
Of course with any calculation that relies on forecasting, the quality and availability of the data are as important as the granularity of that data. Essentially, every institution wants to avoid having too little data and unnecessarily reducing capital due to overstating the required reserve amount. This is where the problem of data liquidity comes into focus.
“With this shift, it will be imperative for institutions to look at how their data is collected and organized,” Faquir explains. “Banks all have the key data sets for CECL, but the big question is: Is that data readily available and can it be put to appropriate use? Banks will be taking a deep dive into the loan data and using it to make reasonable and supportable decisions —something that was not as crucial for most institutions under the incurred loss method.
“For example, we speak to a large number of banks and credit unions that only pool or segment their loans based on the high-level government reporting codes. However, under CECL, these institutions will be required to use data to defend the segmentation decision. In turn, that same data must also align with other decisions that involve selecting an appropriate methodology for each asset pool, which must also align with the quality and type of available data. Therefore, we quickly arrive back where we started at the issue of data liquidity and having the right data when it is needed to make the right decision.”
Why is Data Liquidity a Concern?
Data liquidity will be problematic for many banks and credit unions because the data necessary for CECL decision-making was not ever anticipated to be applied that way. From the beginning, the Loan Operating System (LOS) or Core Operating System (Core) was only ever tasked with cataloging loans using only a few simple questions:
- What type of loan is this? (Commercial? Consumer? Residential?)
- Is it collateral secured?
- Is it real estate secured?
- Is it owner-occupied?
“These LOS and Core systems are optimal for inputting data, but they aren’t so great at giving an institution their data back in the ways CECL expects,” states Faquir. “This isn’t a knock on those systems; using the data this way was not even on the radar five or six years ago. Now, we are asking these systems to provide us with reports that not only address those four basic cataloging questions, but also layer in other data points, like credit scores or risk ratings, or both, that we can use to help make good CECL-related decisions.”
Decisions like, how to segment our asset pools or which methodology will be the most effective for my CECL calculation. However, due to the data liquidity issue, financial institutions are forced to make a trade-off—get enough data to support a methodology or to support loan segmentation. The question is: Which is the more valuable trade-off?
“That depends on the institution, but I don’t think it’s a trade-off that they should have to make given how data rich institutions are. As many accountants can tell you, being data rich on paper and being data liquid are two separate issues,” adds Faquir.
Are you CECL-Ready?
As data issues inevitably become apparent during the execution of CECL, implementing a platform that offers various methodology options will help to provide the flexibility that financial institutions need in order to get through their calculations.
PrismPremier CECL 360 is a solution for CECL calculations. The online platform was designed to assist institutions in addressing their varied and unique CECL computation challenges.
CECL 360 was developed with the following key benefits in mind:
- Quality. Detailed reporting provides clear and concise documentation of each calculation and supporting data.
- Flexibility. The software allows for institutions to customize their CECL analysis to adapt to their needs. Multiple methodologies for each asset pool and any subcategories of asset pools can be selected to isolate for more detailed review.
- Simplicity. Institutions can easily access historical information, adjust for past events and future conditions, and develop “reasonable and supportable” forecasts of current expected credit losses over the life of each asset. Easy click-through features also help to simplify the completion of allowance calculations.
“PrismPremier CECL 360 won’t solve the data liquidity problem,” said Faquir. “What it will do is allow institutions to have the ability to find the best methodology for meeting their needs, whatever their data allows.”
Regardless of the methodology and tools, the important thing is that institutions need to seriously begin consideration of the direction they want to take during 2019 and start executing on that plan to ensure that they will have the proper data gathered and available for the methodology chosen.
More information about PrismPremier CECL 360 is available at PrismPremier.com. Via the website, institutions can view a recorded demo or schedule a free online demo.