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Assess-450936-edited.jpgIn the previous post about preparing for your CECL compliance deadline, we established that there is no one-size-fits-all solution under the new standard. We provided some of the key considerations for determining how sophisticated your model should be, as well as unique benefits and weaknesses of the options available to manage the loan pools in your portfolio.

Once you have evaluated the various model options and identified which you’ll use to perform calculations, it’s time to assess your resource capabilities and needs. This is a big consideration with cross-functional implications. It will help to identify the software models and provider that will be the best fit for your institution. In this step, you'll look at four main categories—data, human, credit data management, and technology. Data should be your starting point, as it will influence every subsequent decision at this juncture.

Data: A resource capabilities and needs assessment begins with your data inventory. Ultimately, the goal is to build a comprehensive and user-friendly loan portfolio. The way you collect, store, measure, and manage loan portfolio data should dictate the resources you put in place. Assessing your data inventory will include a review of your probable data elements, current warehousing and automation capabilities, as well as the frequency of change and risk identifiers of the data in your loan portfolios.

Human: The high volume of data being absorbed and managed demands a cohesive, cross-functional team of subject matter experts. This small steering committee or task force should include representatives from across the institution and executive management. Each individual is responsible for disseminating information to his or her respective department and/or senior leadership, and returning with feedback so the committee can make informed decisions that ensure the accountability of the data and its application under the CECL standards.

Credit Data Management: Your institution needs a single, adequate source for managing all credit data. By centralizing this resource, you can ensure your infrastructure, architecture, and applications are appropriate. This determination will take into account the volume and complexity of your portfolio as well as risk factors and credit quality indicators.

Software Provider: Every decision at this phase should inform your decision about a software provider. Numerous good options exist, so the determination will be made predominantly on which provider is the best fit for your institution.

Identifying your Software Provider

Later in the CECL implementation process, you will put checkpoints in place to evaluate the efficacy of your software. Right now, your selection should take into account those points you will test for down the line. In particular, you will set expectations for your chosen software provider regarding:

  • Components, design, and intended use of the system
  • Initial test confirmation that the system is functional and adequate to managing your data requirements
  • Documentation and support for future reference
  • Ongoing performance monitoring
  • SOC 1 reporting

Keep in mind that your current data volume and complexity will determine which models you implement initially. Your data, models, and (consequently) resources likely will evolve. Keep your end goal in mind. While CECL implementation is a multi-factored, long-term process, maintaining sight of the ultimate objectives for your bank will position you to make continual improvements to the efficiency and internal controls impacted by CECL.

To recap, we have detailed how to:

  1. Analyze the concentration exposure risks within your loan portfolio
  2. Clarify the credit quality indicators (CQIs)
  3. Select the appropriate CECL model(s) for each loan portfolio
  4. Assess your resource needs and capabilities

Next week, we will look at the tasks and resources necessary to perform CECL model simulations for reasonableness and to evaluate which software solutions will meet the needs of the institution.

HORNE has offered a series of resources, including a webinar and visual eight step timeline with the intent to educate you about the CECL standard, its impact on the banking industry, and what you need to do to prepare for the changes. Over the coming weeks, we will use the blog to look more closely at each of the individual steps. These are posts you will want to bookmark for reference so you can refer to the information as you get farther into the process.

Remember that you can access our complimentary one-hour webinar anytime for more help with the steps and tactics involved in working toward compliance. Watch the CECL: Turn Compliance into Opportunity on demand.

 

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THIS POST WAS WRITTEN BY Hans Pettit

Hans serves as a partner in HORNE's financial institutions practice. He is dedicated to helping banks achieve their growth potential using reliable insights and thoughtful guidance. Hans's specialized experience includes growth opportunity planning and assessment; risk management evaluation and structuring; and internal control framework design and effectiveness.

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