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Ethos™ Credit Loss Intelligence

Reserve levels just where you want them

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In 2020, many financial institutions overcompensated for the pandemic-induced recession by setting aside too much capital for reserves to cover future loan losses. This removed valuable capital from the lending stream, impacting lending revenue.

Wells Fargo

$763 M

$1.5 B

Citigroup

credit loan reserves

$2.9 B

JPMC

Sources:

Lending is forecasted to pick up in Q2, making now a good time for lending officers to evaluate portfolio strategies.

14%

Hover over the bar graphs to see the stats

auto loan increase

increase in mortgage loans

$360k

Build

$190k

Annually

$1.310m

5-year cost

Shifting from historic data to forecasting models

Many lenders are now seeking third-party expertise to help re-establish the right reserve levels, so they can free up the maximum amount of capital for lending. Fueling this need is the new methodology called Current Expected Credit Losses (CECL) issued by the Financial Accounting Standards Board (FASB).

Overcompensated loan loss reserves

How is your financial institution planning to implement a CECL-compliant loan loss reserve solution?

Don't go at it alone

70%

Third-party vendors or advisors

Internally

15%

Advisory and internally prepared models

13%

DIY: Building an in-house solution

DIY: Implementing in-house solution

10-12

Set up in months

Build reports in months

10-20%

Solution value price-to-accuracy ratio

6-8

Which of the following will be challenging to implement?

38%

Model development

CECL Readiness

CECL Challenges

40%

Methodology governance

43%

Model testing and validation

45%

Policy, procedures and internal control documentation

75%

Reasonable and supportable forecasts

41%

Have a centralized data source

39%

Reported data as the most challenging CECL task

30%

Have 10+ years of data

24%

Have complete and reliable data for CECL

Data is key to any CECL implementation

CECL requires financial institutions to estimate expected losses throughout the life of their entire as-current portfolio on a rolling basis, and consistently adjust loan loss reserves accordingly.

CECL stands for Current Expected Credit Losses. It's the new methodology for estimating allowances for credit losses issued by the Financial Accounting Standards Board (FASB).

What is cecl?

Preparing for CECL: The 12-month Road to Compliance

Until now

What changed?

Financial institutions (FIs) only had to worry about daily loan losses.

FIs must worry about the lifetime of their loan portfolios.

Going forward

Those expected losses are recognized the day the asset is booked.

Effective Immediately

A long runway

3-6 months

6-9 months

12 months

Select forecasting solution

Enable, test, implement

Get baseline ECL

Develop parallel ALLL/CECL reporting

Implement strategic response plan

Begin strategic response planning

Change over to CECL

Parallel reporting and track impact

Time is on your side

18 months or more to CECL compliance

A CECL timeline in reverse

January 1, 2023

CECL becomes effective.

Must reserve day-one exposure starting January 1, 2023, and therefore must start with September 30, 2022 data.

September 30, 2022

Before you can run parallel reporting, processes and procedures are approved and ready to go.

June 30, 2021

Run parallel reporting for at least a year to finetune data models and adjust loan pricing as needed

September 30, 2021

Select your CECL solution provider!

Present

2: https://www.globenewswire.com/news-release/2020/12/10/2143011/0/en/2021-U-S-Consumer-Credit-Market-Will-See-a-Rebound-in-Originations.html

3: https://www.alll.com/alll-regulations/fasb-cecl/cecl-survey-most-bankers-to-use-3rd-party-vendors-advisors-for-cecl/

4: https://www.equifax.com/business/cecl-readiness/

5: https://www.mossadams.com/getmedia/46adb43a-e0da-40c4-8458-242d45ea6dbd/cecl-survey-report

1: https://www.pymnts.com/news/banking/2020/biggest-banks-reserve-30b-for-loan-losses-from-pandemic/

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Preparing for CECL

CECL Readiness and Challenges

Reserve Levels Where You Want Them