Assess existing models for their adequacy and ability to measure expected credit loss based on the CECL requirements and emerging industry practices.
The CECL capabilities review team will review the reporting institution’s existing risk grading and modeling functions to identify existing capabilities that can be leveraged for CECL. Typical models that will be assessed include existing ASC 450 (FAS 5) and ASC 310-10-35 (FAS 114), DFAST or CCAR, Basel or economic capital, and underwriting models.
Example Risk Model criteria considered during the capabilities review include:
Assess current data feeds and sources for calculating ECL and for end-state reporting requirements. The CECL capabilities review team will review the institution’s systems, databases, and data feeds to determine if data required for risk models and future-state financial disclosures is available for use in meeting the new requirements of the new standard.
Historical data will serve as a basis for the estimates that will then be adjusted for current conditions and reasonable and supportable forecasts to estimate the expected credit losses. Asset level data from credit, accounting, and core banking systems will be required for segmentation and cohorting as well as identifying financial assets that do not share similar risk characteristics with other financial assets for which the evaluation should be performed on an individual basis.
Example aspects of a client’s Data and Systems that may be examined:
Identify and recommend changes to credit risk and management processes, hand-offs/transitions, policies, and governance. As CECL is a significant financial statement estimate, it should be executed in a controlled environment using an accepted controls framework such as COSO 2013. All processes and controls should be documented using process flow charts, narratives, and risk and control matrices, and any changes to the process should go through an established change control process with appropriate levels of review and approval.
Once the current operating model for estimating the expected losses for accounting purposes is properly understood, it can be compared against a target state that has been designed considering the CECL requirements. As with any business process improvement, there should be a special focus on hand-offs between organizational groups—as they are often a source of difficulties.
*Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates. KPMG Global Credit Loss Accounting (gCLAS™) services are not permissible for KPMG audit clients and their affiliates.