When the International Association of Credit Portfolio Managers met at the beginning of November in Washington, D.C., for its fall conference, the assembled group focused heavily on the impact of credit losses. Conference participants were concerned about how the new CECL and IFRS 9 regulations would impact their provisions, earnings volatility, and capital calculations.
As recently as September, banks were woefully unprepared with systems and data to appropriately calculate new credit loss guidelines. However, as the implementation dates loom ever closer, it's becoming critical for banks to educate themselves and determine what changing accounting standards will mean for their organizations.
"This gives banks just over a year to get the right processes in place."
What is it?
The "new" accounting standards, IFRS 9 and CECL, change the way a bank recognizes, measures and discloses financial risk related to credit losses. Organizations are being forced to shift from an incurred loss model to a forward-looking expected loss model.
CECL – Banks will be forced to incorporate reasonable and suitable forecasts in their evaluation models. Lifetime expected credit losses are estimated for all originated and purchased assets, regardless of the credit quality, and the assessment is performed on a collective basis for assets that share similar risk characteristics.
IFRS 9 – Instruments will be measured for losses in a dual-measured model, and allowance for losses will be either: 1) 12-month expected losses on booking of the asset where no significant risk is expected or 2) lifetime expected credit losses where a significant credit risk has occurred since initial origination and recognition.
What should banks be watching out for?
Banks will need to work through the implications that CECL and IFRS9 have to provisioning under the incurred verses expected loss model. As provisions will change, banks will also have to assess the impact on earnings volatility and capital adequacy. All these measures directly impact return on risk and profitability, which are important drivers in pricing. As the new standards go into effect, it will be crucial for banks to be able to understand the holistic effect on lending portfolios, both for capital allocation and for profitability measurement. Banks will need to collect the right data during the origination and pricing process to assess the business impact of CECL and IFRS9 in order to adjust their business strategies and get a pulse on where they have pricing power and which customers contribute most to their bottom lines.
The DealPoint difference
The transition from incurred to expected losses will have an impact on pricing and profitability measurements once the banks adjust and implement the new models. Banks will have to re-forecast the profitability of their existing and new business by customer, products, and lines of business. DealPoint can help banks do this readily given its ability to capture granular transaction pricing data, forecast relationship profitability, and report performance by product, customer, region, lines of business, or any other dimension.
Get in touch with Brilliance Financial Technology today for more information about how DealPoint can help your institution automate the pricing process and be prepared for the upcoming changes to your business.