The Current Expected Credit Loss (CECL) Challenge

The 2016 Financial Accounting Standards Board (FASB) guidance on the Current Expected Credit Loss (CECL) approach is a radical change in how the financial industry is required to account for Allowance for Loan and Lease Losses (ALLL). Starting in 2020, CECL requires institutions to provision for losses over the entire life of each credit exposure at the incidence of booking, instead of the current ALLL approach when the losses are incurred.

Due to the wide latitude allowed in achieving this objective, the general responses by the industry, accounting firms and advisory firms have been to repurpose existing methods in wide use and layer management's judgment over these methods to estimate the CECL lifetime losses using "reasonable and supportable" forecasts.

The incurred loss approach depends on charge-offs that are a lagged recognition of losses of impaired loans, but do not capture their quality deterioration that occurred well before the incidence of default.

The CECL Solution: PortfolioView™

Financial Analytics resolves this drawback by capturing the earliest deterioration in any portfolio, and projecting these quality transitions into the future until the exposures are off the banking book. The methodology depends on a structured internal loan data history of the institution and an associated set of algorithms.

PortfolioView™, Financial Analytics' risk management system, integrates any and all internally available risk related information to generate CECL based expected loss and unexpected loss of both commercial and retail portfolios. The system takes account of obligors' credit quality, cash payments, cash draws, write downs, and recoveries with the added benefits of potential diversification across portfolios and geographies.

PortfolioView™ can analyze any slice of the wholesale or retail portfolio such as by asset type, collateral type, geography, industry code, vintage, internal or external credit scores, risk rating and by any combination of these slices. Using regularly updated internal data, the system is able to capture early signals of improving or deteriorating portfolio trends, so that the institution can appropriately respond. With intimate knowledge of every slice of the portfolio, management can grow low-risk, high-profitable segments while rolling off high-risk, unprofitable segments to maximize long-term value, as they comply with CECL requirements.