Is Your Business Getting The Full Bang for Its CECL Buck?

Accounting and regulatory changes often require resources and efforts above and beyond “business as usual”, especially those like CECL that are significant departures from previous methods. The efforts needed can be as complex as those for a completely new technology implementation and can take precedence over projects that are designed to improve your core business … and stakeholder value.

But with foresight and proper planning, you can prepare for a change like CECL by leveraging resources in a way that will maximize your efforts to meet these new requirements while also enhancing business value. At Financial Risk Group, we take this approach with each of our clients. The key is to start by asking “how can I use this new requirement to generate revenue and maximize business performance?”

 

The Biggest Bang Theory

In the case of CECL, there are two significant areas that will create the biggest institution-wide impact: analytics and data governance. While the importance of these is hardly new to financial institutions, we are finding that many neglect to leverage their CECL data and analytics efforts to create that additional value. Some basic first steps you can take include the following.

  • Ensure that the data utilized is accurate and that its access and maintenance align to the needs and policies of your business. In the case of CECL these will be employed to create scenarios, model, and forecast … elements that the business can leverage to address sales, finance, and operational challenges.
  • For CECL, analytics and data are leveraged in a much more comprehensive fashion than previous methods of credit assessment provided.  Objectively assess the current state of these areas to understand how the efforts being put toward CECL implementation can be leveraged to enhance your current business environment.
  • Identify existing available resources. While some firms will need to spend significant effort creating new processes and resources to address CECL, others will use this as an opportunity to retire and re-invent current workflows and platforms.

Recognizing the business value of analytics and data may be intuitive, but what is often less intuitive is knowing which resources earmarked for CECL can be leveraged to realize that broader business value. The techniques and approaches we have put forward provide good perspective on the assessment and augmentation of processes and controls, but how can these changes be quantified? Institutions without in-house experienced resources are well advised to consider an external partner. The ability to leverage expertise of staff experienced in the newest approaches and methodologies will allow your internal team to focus on its core responsibilities.

Our experience with this type of work has provided some very specific results that illustrate the short-term and longer-term value realized. The example below shows the magnitude of change and benefits experienced by one of our clients: a mid-sized North American bank. A thorough assessment of its unique environment led to a redesign of processes and risk controls. The significant changes implemented resulted in less complexity, more consistency, and increased automation. Additionally, value was created for business units beyond the risk department. While different environments will yield different results, those illustrated through the methodologies set forth here provide a good example to better judge the outcome of a process and controls assessment.

 

 Legacy EnvironmentAutomated Environment
Reporting OutputNo daily available manual controls for risk reportingDaily in-cycle reporting controls are automated with minimum manual interaction
Process SpeedCredit run 40+ hours
Manually-input variables prone to mistakes
Credit run 4 hours
Cycle time reduced from 3 days to 1 for variable creation
Controls & AuditMultiple audit issues and Regulatory MRAsAudit issues resolved and MRA closed
Model ExecutionSpreadsheet driven90 models automated resulting in 1,000 manual spreadsheets eliminated

 

While one approach will not fit all firms, providing clients with an experienced perspective on more fully utilizing their specific investment in CECL allows them to make decisions for the business that might otherwise never be considered, thereby optimizing the investment in CECL and truly ensuring you receive the full value from your CECL buck.

More information on how you can prepare for—and drive additional value through—your CECL preparation is available on our website and includes:

White Paper – CECL: Why the expectations are different

White Paper – CECL Scenarios: Considerations, Development and Opportunities

Blog – Data Management: The Challenges

Macroeconomic Effects on the Modeling of Private Capital Cash Flows

The demand of private capital investing has investors clamoring for more information about prospective cash flows. Historically, that data has been hard to estimate. Because the investments aren’t traded on a public venue, there are few figures generated beyond the data received by existing investors.

So what’s an investor to do? FRG has developed a Private Capital Model solution that provides more insight and understanding of the probable cashflows, one that includes the macroeconomic variables that have been found to influence cash flows and significantly improve the forecasting probabilities. We have found those variables create a more complete picture than the Takahashi and Alexander model, commonly used within the industry to provide guidance around cash flows.

Three of FRG’s modeling and investment experts – Dr. Jimmie Lenz, Dominic Pazzula and Jonathan Leonardelli – have written a new white paper detailing the methodology used to create the Private Capital Model, and the results the model provides. Download the paper, “Macroeconomic Effects on the Modeling of Private Capital Cash Flows” from the Resources section of the FRG website. Interested in a perspective on an investor’s need and utilization of cash flow information? Download FRG’s first Private Capital Fund Cash Flows paper.

Data as a Service (DaaS) – The Benefits

Let’s start with a succinct summary of the benefits of DaaS.

Data as a Service (DaaS) is one way to consistently deliver and effectively manage data from multiple sources across the firm, both internal and external. It can be used as one “logical” and centralized, authoritative (golden) source for critical data used across the organization.

It is an efficient way to deliver data that can also improve speed to market on requests for new and additional data, either from internal parties or regulators or substitute sources.

DaaS can thus be used effectively to achieve the following:

  • Reduce the cost of supplying non-proprietary external data needed across the firm
  • Quickly deliver internal, proprietary data to groups that need to share data
  • Deliver a single view of the data across Finance, Risk and the Business to meet business and regulatory demands
  • Provide a 360-degree view of clients for firms with complex client relationships and service organizations
  • Deliver a definitive record of a firm’s products across the organization

At the same time, the quality of the data can be monitored and reported centrally, along with federated (decentralized) data ownership. This allows ‘data owners’ to be responsible for defining and maintaining the data that they generate and know best, allowing others to ‘share it’. Examples include definitions of a firm’s products by the marketing groups or analytic calculations, such as Risk-Weighted Assets or capital calculations from Finance and Risk groups. Transparency of the data is increased and reuse of data is facilitated.

Critically, the quality of data can be significantly improved when DaaS is implemented within a firm. Central data monitoring, access and updating by the Sources of Record makes sure the data is sourced from the owners on a timely basis. Sharing of data and reuse, with multiple eyes on the same data, allows for quick resolution of errors and can save companies potential embarrassment.

All of this leads to three key benefits for firms:

  • Agility: Firms become more agile as they can quickly implement changes and roll out new data because of the unified data models, transparency, and simplicity of the process.
  • Flexibility and Cost Efficiency: New applications and necessary regression testing – which verifies that software previously developed still performs the same way after it’s been interfaced with other software – is easier as definitions, structures and data models are already known and often enhanced and extended.
  • Transparency: Firms utilize unified data models, definitions, metadata, tools, and support. They can leverage the specific experience of data owners and providers to access data closer to the source and increase transparency and benefit from enhancements.

All of the above seems so logical, so sensible. And it is. As we’ve seen, however, it’s not the logic behind the DaaS process which trips people up; it’s mastering the practical implementation of the process.

In the next blog, we offer a check list of things to consider when you’re developing a DaaS solution for your firm.

 

Dessa Glasser is a Principal with the Financial Risk Group, and an independent board member of Oppenheimer & Company, who assists Virtual Clarity, Ltd. on data solutions as an Associate. 

 

Questions? Comments? Talk to us on Twitter @FRGRISK.

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