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The Impact of CECL

The FASB’s new CECL accounting standard is the most impressive accounting change for the banking industry in over a decade. But what does it mean for the Data Analyst?

May 2019

The Impact of CECL

       John Bevan

       Vice President, USA



“Is it too late for congress to stop CECL?” 

“Companies lag on getting ready for CECL”

'Absolutely devastating’ to small lenders: Lawmakers lay into CECL


These are just three of the headlines I’ve seen on the latest regulation craze this week. Yes, I’m talking about the new Credit Loss Accounting standard that is poised to replace ALLL. It’s called CECL and is being rolled out in its entirety in January 2020…

The Federal Reserve believe this will increase industry allowances from 30% to 50%.


I’m going to start by saying I am speaking to you as a recruiter and not as a financial economist…even if I try and sound like one…

The regulation has been slammed by many in the banking industry. They believe that in order to comply with the regulation they will effectively have to forecast the state of the economy. It also ‘forces the financial institutions to recognise expected future losses immediately, but does not allow them to recognize immediately the higher expected future interest earnings banks receive as compensation for risk.’ This is where the complications start. How much work has to go into this to gather the necessary data? How many years do companies need to go back?

So far only 43% of Financial Institutions collecting and retrieving data for CECL ‘have expressed confidence that the data will be sufficient for CECL’. It’s quite the task going back through 7/8 years’ worth of data…

Further to this, The house financial services committee has charged ‘that the Financial Accounting Standards Board will pose undue compliance burdens for community banks and credit unions’. This accusation forced a round table discussion on CECL rules.

Ultimately the regulation could well improve profits for banks but could limit what’s available as they are required to keep a higher capital reserve. This could push prices for consumers way up…

“I think CECL is a good thing. In a sense, it will make the system more safe.”


What does it mean for an analyst?

Even though this regulation will bring significantly higher data requirements, your day to day work as a Risk Analyst won’t see any major changes. There will be hurdles to jump over when it comes to estimating on defaults or forecasting losses but this was/is expected. There is more data to look at so there will be a need for more advanced PD, EAD and LGD models and this is yet another reason to learn open source tools as quickly as possible. The smart money is on Data Science techniques bridging the gap even further and you don’t want to get left behind if you can only work with SAS, Stata or E-views.

I spoke with an Executive Director at a big American bank about his experience working on CECL models: “You certainly need to have a broader understanding of Credit Risk to work on CECL models...This is a different set of Modeling assumptions. I have worked for 5 years on Stress Testing for CCAR and for the last year CECL – you need to have that experience to handle the new methodology of CECL. I credit my experience of working on a consumer portfolio for 5 years.”

The good news is that companies have probably been using the same framework that CCAR/DFAST brought in terms of their infrastructure and will make the implementation of CECL models that bit easier.

The same Executive Director said, “I think CECL is a good thing. In a sense, it will make the system more safe.”

This particular bank is in its last month of the implementation process and will spend from now until December making sure they are prepared for January. The smaller banks and lenders will then have another year to get to the same position.

If you’re a Quantitative Analyst that already has experience of implementing or validating CECL models, most likely at JPMC, Citi, Wells or BofA then there are some very exciting things available to you. Consulting firms will be all over your profile knowing that you already have the necessary experience (They are building out teams as we speak and have been for the last nine months) The smaller banks getting ready for 2021 will also be very interested to see what you can offer them and hope that you can help them avoid any mistakes in the process.

If you are interested in speaking in more detail then let me know and we can set up a call. If you’re a candidate who has experience on CECL models, then we have several companies and teams who are expanding…