Daily News: August 26, 2014

Majority of Banks Not Prepared to Meet ALLL Requirements

Sageworks, a financial information company, reports that despite accounting standard changes on the horizon later this year, the majority of banks are not currently prepared to meet the requirements of the proposed model, which will mandate how banks calculate their allowance for loan and lease losses (ALLL). Sageworks notes that this insight is derived from a survey regarding financial institutions’ plans and their current process for calculating the ALLL, a balance-sheet reserve for expected credit losses.

According to Sageworks, the survey uncovered three primary findings that shed light on financial institutions’ readiness for the impending changes:

  • Manual processes, which may be insufficient for handling the complexity of the new model, are prevalent in current calculations of the ALLL.
  • A significant share of credit risk managers indicated little to no familiarity with the model expected to be adopted by the Financial Accounting Standards Board (FASB).
  • Many banks are awaiting the finalization of the FASB’s Current Expected Credit Loss (CECL) model before making substantial modifications to their current processes.

The recent study surveyed executives in credit risk management at U.S. banks and credit unions.

Ed Bayer, managing director, financial institutions division at Sageworks, commented, “With the impending changes all but imminent, banks should be upgrading their processes and practices to capture a vast amount of data at the loan level. Capturing this data dynamically, archiving the data at each month’s end and making it accessible, will be crucial for defensibility and to limit subjectivity under the new model.”

To read the entire Sageworks press release, click here.