Is Your Credit Union Ready for the 2023 CECL Deadline?

Current Expected Credit Loss has been a controversial topic since the Financial Accounting Standards Board issued the regulation in 2016. CECL replaces the current incurred loss model, used by financial institutions to track their losses, in favor of an expected loss model. The new model requires institutions to project expected credit loss over time, as opposed to waiting for a trigger event or loss to occur.

With the original 2020 CECL deadline rapidly approaching, FASB is receiving major pushback from Congress, federal financial regulatory agencies and industry advocates. The strongest point of concern is the increased amount of resources that community financial institutions will need to retain to cover the estimated expected losses over the life of every loan.

And the future of CECL remains uncertain due to differing priorities from the regulatory agencies and Congress. FASB has stated that CECL will move forward as planned, but members of Congress claim that the regulation should be delayed or repealed. In light of this, FASB recently announced that the deadline has been pushed to January 2023, for non SEC filers, to ensure credit unions have the opportunity to meet the regulation’s requirements.

With all this uncertainty, credit unions need more guidance on how to prepare for the new rules. Many of them have put off preparations because they don’t know where to start – or if they should start at all. However, with tensions continuing to brew and the deadline approaching, credit unions have limited time to decide on whether to comply with the new rules.

Concerns and Risk for Credit Unions

Most criticism of CECL stems from the additional capital requirements for risk assessments. Many believe that the new standard is too complex and costly to implement, and that it should not be a requirement for smaller financial institutions, particularly credit unions.

As not-for-profit organizations, credit unions often don’t have the same amount of expendable resources as larger financial institutions, making this regulation more difficult for them to adopt. Smaller institutions are also concerned about the risks associated with failing to comply with the new rules, including significant criticism from their examiners and external audit firms, and high monetary penalties.

If the higher capital requirements reduce the amount of money available to lend to members, credit unions may also see a decrease in business and stagnant growth. These risks can even apply to credit unions that try, but are not successful, in adhering to the new regulations; they might not only waste significant resources and capital, but also damage their current business model.

Credit Unions, There Is Still Time

It’s not all bad news for credit unions, especially now that extra time has been allotted to meet the CECL demands.

Still, according to a survey conducted by Banking Journal, “53% of respondents indicated they had ‘given CECL serious consideration, but had not put the wheels in motion.’” At this point, credit unions should be beyond the thinking stage.

So, where should credit unions stand at this point? To not fall behind, institutions should be at one of the following stages:

• Data Gathering Phase: Collecting all loan and lease data into one repository;

• Loan Categorization Phase: Sorting and classifying loans and leases based on risk; or

• Parallel Modeling and Methodology Selection Phase: Running parallel models of categorized loans against the current Allowance for Loan and Lease Losses model to establish the best expected loss methodology to use and measure the effect on required capital reserves.

Credit unions must begin implementing the new changes because advocating to push back the deadline can only go so far without presentable, concrete evidence that the new system will harm them. Thus far, FASB has heard only predictions about CECL disruption. They have not been presented with substantial factual data demonstrating considerable growth in capital reserves.

Until credit unions compare the differences between their current ALLL model and their future CECL model by running parallel models, they can’t prove that the predictions of 30% to 50% increases will occur. In other words, until they try to adopt the regulation, they can’t prove to FASB that it won’t work.

Although most of the discussions about CECL claim that it will be detrimental to credit unions, there are some groups that believe it will be beneficial. In mid-2018, the Invictus Group conducted a study on CECL impact. The results were surprisingly optimistic for credit unions, concluding that “bigger banks would feel the brunt of the pain.”

Invictus predicted that smaller institutions “may actually benefit, even though they will face the toughest challenges in implementing.” With that, it’s prudent that credit unions take necessary steps now, in plenty of time to prepare for CECL.

Keith Monson is Chief Risk Officer for CSI. He can be reached at 800-545-4274.