‘Perfection’ in adhering to CECL not necessary – but ‘thoughtful documentation’ vital, national bank regulator says

“Perfection” in adopting current expected credit loss (CECL) requirements at the start of the new year is not expected, the regulator of national banks said Monday, adding that small institutions don’t need big models or overly complex methodologies in adopting the accounting standard.

In comments Monday to a conference focusing on risk management, Acting Comptroller of the Currency Michael Hsu said his agency’s expectations are scaled to the size and complexity of an institution. “Small institutions don’t need big models or overly complex methodologies,” Hsu said. “We understand that the estimate will continue to evolve and become more refined over time, and don’t expect perfection on Day 1.”

The head of the Office of the Comptroller of the Currency (OCC) also said banks adopting the CECL standard (which becomes mandatory on Jan. 1) will find many benefits with the new standard. “We’ve heard fairly consistently from institutions that have implemented CECL that it better aligns with their credit risk management practices and has brought together multiple disciplines in the organization such as credit risk, accounting, modelling, and treasury that may previously have operated more independently,” Hsu told the RMA Risk Management Virtual Conference.

“We’ve also observed that the quality and transparency of the discussion around credit loss estimates has improved under CECL,” Hsu said. “I think all stakeholders—management, boards, investors, regulators and others—are benefiting from the discussion shifting from ‘what’s happened,’ to ‘what do you expect to happen and why, what’s driving your assumptions, and how could they change.’ This is more decision-useful information for all stakeholders, including regulators,” he said.

However, Hsu said CECL must be exercised “in a disciplined manner” to ensure safety and soundness.

“There needs to be appropriate support and documentation of management’s judgments,” Hsu said. “We expect thoughtful documentation of the methodology selected, as well as management’s assumptions, decisions, expectations, and qualitative adjustments. This is an area that our examiners will be monitoring closely, especially as it relates to any changes in an institution’s credit loss methodology and assumptions. We understand and expect that credit loss estimates will change with the economic outlook and as new information surfaces; however, any changes to credit loss estimates need to be appropriately supported and documented.”

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