Santa Fe, NM 87501
CECL: The new accounting standards, 6 Jan 2016
The evolution of credit unions
We all know that our economy and our society is evolving rapidly through data collection and advanced analytics, yet we are surprised by news each day of another business area adopting advanced techniques. Within the world of finance, credit unions are beginning this same evolution.
We might think “even credit unions” are changing, but with thousands of credit unions and a naturally more collaborative environment, groups of credit unions are combining resources to deploy advanced analytics. Although this will happen naturally, the proposed CECL accounting rules for loan loss reserves will cause a dramatic shift in the use of data and analytics at credit unions, comparable to the changes occurring at larger banks due to CCAR and DFAST.
Recently, I had the pleasure of presenting a webinar sponsored by OnApproach, a Credit Union Service Organization, and Deep Future Analytics, an advanced predictive analytics solution for Credit Unions and Community Banks.
In Preparing for CECL I discussed what will be needed to estimate the numbers needed for CECL. Vintage analysis, macroeconomic factors, and credit quality adjustments will all be key components. I believe that those who designed CECL asked for all the right things, but did not realize the effort and investment required to comply. The goal of my talk was to highlight that CECL is an investment, not a cost, because if done right, the insights gained will directly impact pricing and underwriting, portfolio management, and risk appetite assessment.
I'd like to share the slides from the presentation with you, and feel free to reach out with thoughts.
Download the pdf here: Preparing for the CECL
One graph from the presentation highlights that loss forecasting is more than scores. FICO / Bureau scores measure historically observed consumer risk, not the risk after the consumer is given a new loan. The graph here shows that scores were largely unchanged throughout the last recession.