CECL Denial: A Q&A With Fiserv’s Tom Caragher

Companies can't wish the current expected credit loss (CECL) standard away. It’s critical that executives understand what is needed to meet requirements, and start now.


For SEC filers, the new credit losses standard, based on the current expected credit loss (CECL) model, is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities, including certain not-for-profit and employee benefit plans, have an additional year.

FEI Daily spoke with Tom Caragher, product manager, Enterprise Performance Management at Fiserv about why so many companies have fallen behind in their preparations for the CECL.

FEI Daily:  Are there specific industries that are going to be affected? Or is it industry-wide?

Tom Caragher: It's across the entire industry. Anybody that falls under FASB is covered. They need to ask if they have anything on the balance sheet that could have credit exposure that they need to reserve for in case there's a default.

Typically we think about it in terms of banks and credit unions, but since it is an accounting standard it goes much broader than that. We've got insurance companies, finance companies, mortgage companies, investment companies, but beyond that any company with any exposure.

FEI Daily: What do companies need to be evaluating?

Caragher: Anything that's held to maturity needs to be evaluated. A lot of institutions don't have held-to-maturity anymore. The last crisis pushed them to make them all available for sale. This is going to keep them there, because they don't want to have to set up a process for the investments. But they need to ask if some of those investments held to maturity. That could be treasury departments for different companies, not just banks and credit unions. Municipalities have investments they need to evaluate, department stores that issue credit cards. Those need to be evaluated.

FEI Daily: What are the myths and misconceptions you hear about CECL?

Caragher: One of them is that credit cards are excluded from CECL. They're not. Something that has typically the highest loss rate on your balance sheet wouldn't be excluded from something to quantify the losses on your balance sheet.

Another is asset size. Some people think it's 10 billion and above, which isn't true.

Some people will say, I'm not covered because I don't have losses. But you still have to prove it.

People think you don't have to have historical data because it's forward-looking. But, you have to have history to prove out. Your assumptions have to be anchored in your history. And that history speaks to your experience and what your loss rates are.

There is a segment of the market, through all of those different finance companies, whether they're banks, credit unions, or insurance companies, etc., that are a little slow on the uptake. They're just starting to realize that maybe they need to pay attention to it. That's going to put them behind the curve. The reason why is because of the historical data they need. The auditors and regulators really want them to have their own history. They want it to go back far enough so that it reflects a life of loan loss rate. So, if I've got a five-year contractual term, I want at least five years of history to show what's my life of loan loss rate for that balance. They'll be lenient as they start because they know people might not have all that but they want to see a plan to how I'm going to get there.

I urge people to not make assumptions. If there's any question at all, unless you really truly do know definitively, go ask your auditor. Get the auditor's opinion, the one who's going to come in the door and give their final say.

FEI Daily: Where should companies be at this point?

Caragher: They need to bring a team of people from different functions in the organization together. Cross functional team, different disciplines. So the chief credit officer, risk officer, treasurer, CFO, comptroller, IT.

That team will then start to identify what data do we need, what are the data points, where am I going to get it? And then once they've identified that and a regular way to update that data and continue to build out the history.

Companies should be storing the data already. They should be past the point where they put the team together. But there are quite a few that are just starting to hear that they need to put a team together. A lot of people are behind.

Some institutions are way ahead, but they're the exception. Community banks, credit unions, that sort tend to be a little bit further behind. I've talked to several this year and when I've asked how much history do you have, their response was we're going to start gathering it this month. Whereas I could talk to a larger firm or somebody that's more proactive even though it's a community bank, that has had a team in place, a process in place, they've been gathering it for some amount of time, they're ready to go. But, most are just starting the discovery process.

FEI Daily: What is that a symptom of? Are they hitting roadblocks?

Caragher: Denial. A lot of people were sitting on the side waiting to see if it would go away. Will they exclude me? Or will they reverse the rule?

Everybody had hoped, prior to the ruling being finalized, that it would just go away. When it was finalized, they were still hoping there'd be tweaks and carveouts. Some people still think along those lines, but the vast majority are starting to come to the realization that this is real and they need to start to plan, but they're just kicking that off now.

There was another myth that you deal with pretty regularly on whether who or what can make it go away. I've heard several times this year that the President will make it go away. And that's beyond his control. And Congress can't make it go away. Being a FASB ruling, there's a whole process that has to be in place of people and that would take a long time. It's not something that's easily done. By the time somebody was able to do that, if they could, it would be enacted.

FEI Daily: For those companies who are on track, what challenges are they facing along the way?

Caragher: It starts with the data storage. There are going to be data points that people collect that they won't need in the end. It's easier to get everything and then find out you don't need something than to find out you need something three years from now and not have it at all. Now you've got this historical data warehouse that you could use for strategic planning and analysis. They can leverage that to be more competitive.