Independent Banker - July 2018 - 61

ADVERTORIAL SPOTLIGHT
POWER LENDING PARTNER$
HOW LENDERS CAN ADAPT CREDIT METHODOLOGIES FOR CECL
According to a survey of banks
conducted by Moody's Analytics, more
than 62 percent of respondents expect
CECL compliance to increase their
overall provisions. Implementing this
 ϐ ǯ 
standard is a long process that can take
between 12 months and two years to
accomplish.
Accurately measuring expected
credit losses not only meets FASB's
new standards; it is a crucial part
of managing a credit portfolio in an
environment with rising compliance
   ϐ Ǥ
ϐ   
banks must leverage a rich data set with
an appropriate credit loss estimation
methodology. These are:
Information set
* Historical experience: Credit loss
estimation based on realized
defaults/losses and credit risk
drivers.
* Current conditions: Current
conditions of the borrower, loan and
market.
* Forecast data: Reasonable and
supportable forecasts of the
borrower, loan and market
characteristics.
Methodology foundation
* Method: Examining existing
loss estimation methods and
determining whether they
  ϐ  
     
starting point.
* Lifetime loss estimates: Over
contractual terms. Also based
on reasonable and supportable
forecasts.
Overview of common ECL
methodologies
Estimating expected credit losses
(ECL) for commercial and industrial
lending remains a top priority for
banks, accounting for about 20 percent
of all loan activity. While various
methodologies exist for estimating ECL,
the following are the most common:
Loss rate approach-Apply either
collective or individual historical loss
rate percentages as a cumulative rate or
as a loss rate curve, and include average
charge-off method, static pool analysis
and vintage analysis.
Rating migration-Calculate percentages
of assets that " migrate " to a more severe
    ǡ 
apply the migration-rate percentages to
the balance in each category.
Probability of default/loss given
default-Separate default and recovery
risk, providing greater insight into
the ECL estimate, and apply to other
business processes such as loan pricing,
limit setting and risk monitoring.
Adapting the right methodology
Lenders can use different methodologies
for CECL. No single industry standard
exists for determining which risk drivers
to include in credit loss forecasts.
However, it is crucial to accurately
 Ǥ   
 ǣ    ϐǡ
borrower industry and asset size, loan
ǡ   ϐ 
and so on. To ease the transition to CECL,
    ϐ 
methodologies for cost effectiveness,
while retaining consistency between
credit, accounting and risk management
practices.
MOODY'S ANALYTICS
TAKES TOP POSITION
AMONG
CATEGORY LEADERS
FOR 2018
CECL TECHNOLOGY
SOLUTION
ǯ  ϐ 
implementation of expected credit loss
and impairment analysis for CECL and
other evolving accounting standards.
We provide advisory services, data,
economic forecasts, models and process
automation solutions that help make
compliance with these standards faster
and easier. Visit moodysanalytics.com/
CECL-Go to learn more.
Mark McKenna, Senior Director
7 World Trade Center
250 Greenwich St., New York, NY 10007
212-553-4829
mark.mckenna@moodys.com
moodysanalytics.com/CECL-Go
http://www.moodysanalytics.com/ http://www.moodysanalytics.com/CECL-Go
Independent Banker - July 2018

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