CFO Focus: Why use multiple CECL models?
Doing so can reduce dependence on large Q-factor adjustments.
As we continue marching towards final adoption of the Fair Accounting Standards Board’s ASC-326 (a.k.a., current expected credit loss, or CECL for short) in January 2023, community banks and credit unions are fully engaged.
When CECL was released back in 2016, the prevailing thought was that achieving compliance basically meant choosing a model and filling it with data. Everyone thought the biggest challenge would be figuring out how to bridge the gap between the allowance for loan and lease losses calculated by the incurred loss methodology to the CECL ALLL.
Now, financial institutions are discovering that complex risk models require some maintenance and that they need to fully understand how a model works to know whether its results accurately reflect the risk in their loan portfolio.
What tools do financial institutions have to ensure that their calculated CECL results accurately reflect the risk in their portfolio? Models are built by humans and, as such, share an undeniable characteristic with their builders: They are fallible.
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