Implementation challenges of CECL Methodology (Current Expected Credit Loss) & leveraging OFSAA LLFP Analytical Solution
In 2012 Financial account standards board (FASB) issued a proposed accounting standard update that proposes that banks and other financial institutions modify recognition of impairment from an "incurred loss" or "probable loss" basis to a "lifetime of loss" estimate. Global financial institutions need to set aside loan impairment reserve for duration of the exposure as opposed to reserving for ''probable losses''. This proposal require banks to calculate loan reserves future loss estimates based on past events, current conditions and reasonable forecasts about the future.
Under this new proposal, though there is no need to determine loan reserve at the loan level it is very important for banks to maintain granular detail throughout the life of the loan. In addition to considering loan attributes, borrower attributes historical loss experience of loan with similar characteristics also need to be considered. Effect of current economic environment as well as projected economic environment arised over the life of the loan.
While implementation of an expected credit loss model require significant work of banks & financial institutions, following are potential challenges to be considered.
a. Complex vintage analysis
b. Data requirements specific to life of loan calculation (LOL)
c. Discounted cash flow analysis
d. Forecastable features(like future drawdowns, delinquency, discount rates, prepayment).
Incorporating CECL method will have significant impact on how banks/financial institutions set aside reserves for future credit losses on impaired assets. In order to address many of these implementation challenges of CECL model Oracle financial services provides packaged solution, OFSAA LLFP which can be leveraged by global banks. LLFP solution provides capability like historical transition matrix , Cohort method for vintage analysis and discounted cash flow methodologies to address these challenges.