The Challenge

CECL compliance is prompting changes that, while challenging, will ultimately lead to better decisions in both risk and capital management. These include:

Bringing together lifecycle data. Using cloud services or other data sharing frameworks, you can overcome silo’d information for a clearer view of the full risk you’re taking on when you book a new account.

Interpreting principles and defending assumptions. How will you define “loss” under CECL? How will you go about calculating “lifetime loss” for credit products that have no defined lifetime? What will your approach be for factoring in the uncertainties of forward-looking economic scenarios? Whatever decisions you make, you’ll need to be able to defend them to senior management, auditors, regulators and shareholders.

Creating granular population segments. How granular can you go in differentiating between relative risk levels in your portfolio populations? Analyzing detailed data for more risk separation will enable more precise loss estimates. Precision is how you keep as much capital as possible available for other business purposes—like launching new digital services that grow your business.

Building and explaining lifetime loss estimation models. How you define “loss” and “lifetime” will affect the types of component models that go into an Expected Loss (EL) modeling framework that’s right for your business. The way your models are constructed and engineered can minimize volatility in month to month loss estimates while improving their explainability. 

Performing rapid re-estimation and reporting. Under CECL, you’ll be re-estimating lifetime losses for all of your accounts at every financial reporting period. A high-performance software platform—rapidly performing massive calculations from diverse data and multiple models—can make outputting the required reports push-button easy.