Addressing CECL Model Pain Points: Expert Advice for Banks

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Are you a CFO or Chief Credit Officer grappling with your bank's CECL calculation, feeling frustrated and overwhelmed? You're not alone. As we pass the one-year mark since the implementation of CECL for most community banks, numerous challenges have surfaced regarding CECL models. In this blog, we'll delve into the four most common problems reported by bankers about their CECL models and provide insights on how to address them effectively.

Issue 1: Black Box Model

One of the primary frustrations with CECL models is their inherent complexity and opacity. Many CECL models operate like black boxes, making it challenging for stakeholders to understand the underlying calculations. This lack of transparency not only hinders effective communication with directors, auditors, and regulators but also undermines confidence in the accuracy of the model's outputs. Software companies often design these models to conceal their algorithms, preventing users from gaining a full understanding of how the model works. This lack of transparency places the burden on bankers to interpret and explain the calculations, often requiring a level of expertise akin to a Ph.D. While some models may not be entirely opaque, deciphering their intricacies remains a daunting task for most community bankers.


Issue 2: Unpredictability

CECL models often yield unpredictable results, particularly as financial institutions approach quarter-end reporting deadlines. Community bankers frequently find themselves in the dark, unsure of how changes within their loan portfolios or external factors will impact their CECL allowance. This unpredictability can lead to delays in decision-making and disrupt the quarterly closing process. Furthermore, when variances occur between current and prior quarter calculations, unraveling the underlying causes can be a time-consuming and arduous task. This lack of predictability not only hampers operational efficiency but also undermines confidence in the reliability of the model's outputs.


Issue 3: Dependency on Q Factors

Despite expectations that CECL would reduce reliance on qualitative factors (Q factors), some models have become even more dependent on them. Q factors, such as macroeconomic forecasts and industry trends, introduce subjectivity and complexity into the CECL calculation process. Overreliance on these factors can make it challenging to justify and adjust inputs from one reporting period to the next. Additionally, auditors and regulators may scrutinize the use of Q factors, viewing them as less reliable indicators of credit risk compared to quantitative data. As a result, financial institutions may find themselves at a disadvantage when defending their CECL calculations during examinations or audits.


Issue 4: Inadequate Response to Risk Rating Changes

Surprisingly, some CECL models fail to react appropriately to changes in risk ratings within the loan portfolio. For example, downgrading loans to special mention status may not trigger adjustments in the CECL allowance, exposing financial institutions to compliance risks. Risk ratings play a crucial role in assessing credit risk and determining the adequacy of the allowance for loan and lease losses (ALLL). Models that fail to incorporate changes in risk ratings may produce inaccurate or misleading results, leading to regulatory scrutiny and potential enforcement actions.


Finding Solutions

If you're grappling with any of these challenges, you have two options: apply temporary fixes to your existing model or transition to a new, more robust solution. While band-aid fixes may offer short-term relief, they fail to address the structural issues inherent in many CECL models. Transitioning to a new solution may seem daunting, but it offers the best chance of overcoming the limitations of your current model. Many banks have successfully made the switch to new CECL solutions, benefiting from improved transparency, predictability, and accuracy in their allowance calculations.


The Invictus Approach

At Invictus, we understand the complexities and frustrations associated with CECL compliance. That's why we've helped numerous banks transition from outdated CECL solutions to our comprehensive platform. Our approach combines consulting expertise with cutting-edge technology, providing financial institutions with the tools and support they need to navigate the complexities of CECL compliance effectively. From implementation and testing to ongoing support and regulatory exams, we're with you every step of the way.


Don't let CECL model challenges hold your institution back. By addressing the root causes of these issues and exploring alternative solutions, you can improve the accuracy, transparency, and efficiency of your CECL compliance process. Whether you choose to apply temporary fixes or transition to a new solution, it's essential to prioritize the integrity and reliability of your CECL calculations. Reach out to Invictus for a free consultation and take the first step towards achieving CECL compliance with confidence.


To schedule a consultative discussion, please reach out to Patti Casaleggio at

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