Compliance KPMG

Are Banks Seeing the Full CECL Picture?

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Banks transitioning to the CECL model may be in for a bigger, costlier, and more time-consuming project than expected- it can impact processes and systems across multiple business units.

Model development may be the highest hurdle, but it’s not the finish line

When the Financial Accounting Standards Board finalized the Current Expected Credit Loss (CECL) standard in June 2016, bank regulators described it as “the biggest change to bank accounting ever,” according to the ABA Banking Journal.

Now, more than half a year later, banks have had some time to digest the impact CECL will have on their internal accounting processes and begin preparing to implement the standard. However, most still have a long way to go.

At a recent KPMG LLP (KPMG) share forum of banking clients, an informal poll of attendees revealed that the vast majority of organizations are still in the planning, assessment or evaluation phases of CECL implementation. Only 2 percent of the audience reported that their firms are in the process of designing a solution to adopting the new standard.

Banks that are too narrowly focused on developing allowance and impairment models to align with the standard—at the cost of all other business aspects of the CECL project—may be in for a rude awakening.

True, developing and fine tuning allowance and impairment models is probably the highest hurdle for banks to cross. CECL represents a significant shift in how banks recognize credit losses, and may require banks to develop or enhance methodologies for measuring and forecasting future loan performance.

But selecting and adopting a loss methodology is only the beginning. Banks that are overly focused on modeling changes in their current assessments are leaving key areas off the table that may ultimately come back to bite them.

CECL’s operational impact is greater than some banks realize

Some banks may need to develop new capabilities to implement CECL, including more sophisticated ways to capture, manage and analyze data to estimate, analyze and report expected losses. For some entities, the standard may have a pervasive and permanent impact on processes and systems across multiple business units.

In other words, applying CECL may be a much bigger, costlier, and more time-consuming project then some banks may realize.

Whatever phase of the implementation banks are in today, it is critically important that they take into consideration the entire scope of the CECL transition and begin planning and budgeting for the full project life cycle.

Looking beyond the models

From our work advising major accounting change efforts in leading U.S. banking institutions, we have identified some core areas banks may be overlooking but that they may want to consider as they mobilize their CECL efforts. The transition will be smoother, faster, and more cost-effective if they address these areas up front, rather than after the fact.

Project management and ongoing governance

To oversee the implementation, manage the transition, and align the organization with regulatory expectations on an ongoing basis, banks should establish a centralized, cross-functional steering committee that takes ownership of key decisions and provides oversight along the way. It will be important to include leaders from accounting, risk, operations, data and technology groups, as each function will be significantly impacted under CECL.

The risk function, especially, should be a valued partner in the project. In our informal survey of bank representatives, only 24 percent of institutions reported have multiple sponsors (i.e., finance and risk) for the CECL transition. The problem is that most accounting change projects are siloed off under the accounting function. But CECL is more than just an accounting change. It would be a mistake for the risk function to view CECL as an “accounting problem,” because risk modeling is a core part of the standard.

Therefore, the risk function must be fully on board and own the adoption alongside accounting and finance. That means getting risk modelers integrally involved in the project from the beginning and encouraging them to internalize their role in the project as a priority part of their daily jobs.

Data and technology

Our informal survey revealed that the availability of data is among the main challenges for implementing the new standard. Therefore, entities should look closely at the data they may need to store now, and plan for the data to be in an accessible and uniform system to support a variety of CECL methodologies that could potentially be used in the future.

Banks may need to update cumbersome data capture and storage processes to help them meet the requirements of CECL. For example, in some cases, spreadsheets and manual solutions may not be sufficient to handle the sheer size and complexity of forward-looking loss reserving.

Banks should also consider how they can integrate systems and automate processes to make data gathering, data analysis and financial reporting faster, more accurate, and more efficient throughout the implementation cycle.

Internal Controls

Another often overlooked area of the CECL transition is internal controls. But control work is likely to be an important part of the transition effort.

As banks develop the financial models they will use under the new standard, they will need to implement processes to validate that their inputs, forecast assumptions and outputs are reasonable and supportable.

In addition, many banks will leverage existing models and forecasts for CECL, such as loss forecasts used for internal management purposes or for regulatory stress testing. If those models and forecasts aren’t currently used in financial statements and therefore aren’t Sarbanes-Oxley (SOX) compliant, banks will need to develop a new set of controls and documentation around them.

Reaching the finish line

CECL is not just another accounting change. Banks face a long and winding road ahead to get their organization ready to comply with the new standard.

As they get started, banks should ensure they take a big picture view of how CECL will change operations throughout the business—and they should do it with a sense of urgency.

Ideally, banks will have, at minimum, a one-year trial run to work out issues in their solution before CECL takes effect in January 2020. That puts the countdown at approximately two years.

That time will surely go quickly. But the right approach, taking all of the potential operational impacts into account, may ease the burden.

Click here to view the suite of services and tools KPMG offers to guide you through your CECL accounting change.

About KPMG

KPMG is a leader in providing financial, risk management, and accounting services to the financial services industry. We serve 75 percent of the top 100 U.S. financial institutions and have a deep understanding of business operations and accounting considerations related to credit loss estimates. Many of our Banking and Finance partners and professionals have worked in the industry they now serve. That means we bring in-depth knowledge and understanding of the issues, enhanced by technical know-how and a tested track record of proactive client service.


Reza van Roosmalen is a managing director in KPMG’s Accounting Advisory Services practice. Ed Bayer is a managing director with KPMG’s Credit Risk Advisory Services practice. Seong-Kwan Hong is a director in KPMG’s Credit Risk Advisory Services practice.

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