As a fast-growing commercial and private bank with $4.5 billion in assets, First Foundation Bank was delighted with their procurement and implementation of Credit Track, Global Wave Group’s straight-through commercial loan origination system.
AuditOne, LLC Co-CEO Jeremy Taylor has prepared a summary of the proactive measures financial institutions need to consider now to better prepare for the new Current Expected Credit Loss (CECL) standard. We’re delighted to host this guest blog post.
A lot is being written these days about the new Current Expected Credit Loss (CECL) standard for the ALLL and what it’s going to do to bankers’ lives. There are plenty of summaries available out there. We’re going to stick here to two angles.
- What you need to do now to prepare. For many institutions (the non-public), there’s still about three years until you need to be reporting your loan loss reserving in accordance with CECL. Which means temptation to postpone. But there are a couple of things all institutions should be doing right now to lay the groundwork, even if time can still be taken for other things (like considering alternative calculation methodologies, available vendor models). That’s because #2 below will require a lot of planning, to ensure you have those needs fully anticipated and ready to go. Which will in turn become the top agenda item for #1.
- Form a CECL Committee. At a smaller institution, the obvious participants are the CCO, CFO and COO/CIO (or their designees), all of them having direct interests in the process. At this earlier stage, the Committee will have an education role for the bank, and will need to be gathering information for future decisions on models, methodologies, et al. But its key near-term responsibility will be to:
- Identify and arrange for collection of all required data. This applies both in terms of time series (i.e., as far back as can reasonably be gathered) and
cross-sectionally (i.e., a broader range of data series than currently required). It applies both to internal data (i.e., loss and other performance characteristics for the institution’s loan portfolio, down to the borrower and loan level) and external (e.g., macroeconomic conditions in relevant markets, peer bank loan performance metrics). It should be noted that identification of data needs will require at least some sense of how reserve requirements will be calculated (modeled).
- What may not have registered. The 2016 guidance on CECL was deliberately vague as to how to go about setting up a CECL-compliant approach. This was appropriate simply because of the vast differences across the US financial system in size, sophistication, data availability, MIS capabilities, in-house expertise/understanding, etc., etc. But there are some key features or characteristics of CECL whose significance and implications may not have fully registered, that we thought might be helpful to highlight.
- The general vs. specific reserving distinction (i.e., FAS 5 vs. 114) is going away. That’s because the current approach to impairment analysis is in line with the general CECL approach (whatever the loan quality) – i.e., estimating potential loss over remaining life of the loan. So the carve-out of impaired loans, with their own manual of requirements, will no longer be needed.
- But there will still be pooling. CECL envisages estimation of potential loss on the basis of pooling assets with similar (risk of loss) characteristics, similar to today’s approach. That could apply to impaired assets, such as mortgages or consumer loans with common borrower and structural features and common drivers of credit impairment. But it is likely that larger commercial loans that are adversely graded will continue to be handled and reported individually.
- CECL will apply not just to loans but also to securities. But not to a trading portfolio. For HTM securities, you’ll need to estimate a lifetime credit loss, just like for loans. For AFS, rather than the current requirement of (irreversible) OTTI assessment, there will be a valuation adjustment to reflect the difference between fair value and amortized cost. Estimation of lifetime expected loss can be done on a pooled basis for securities with similar risk characteristics.
- When you book a new loan or security, you book the expected credit loss as an expense right away. It’s no longer the incurred loss approach of booking when a loss is deemed probable. Rather, it’s an up-front estimation as to how much might be lost actuarially, given the mortality (i.e., default and recovery) characteristics of that type of borrower and loan. On average you’re going to lose a little making a given type of loan; recognizing this with a day one loss provision is entirely appropriate. Doing so will help remind us that our credit spread is intended to cover that expected loss amount (with capital there to protect against outlier (“unexpected”) losses).
- CECL’s impact on reserve levels may be material – but shouldn’t be excessive. Intuitively, moving from losses already incurred (which in practice is typically calculated based on a one-year loss horizon) to a life of loan should boost the required reserves; it means a longer period over which losses might occur. True, but there are offsetting effects. Most importantly, smaller financial institutions today are typically carrying booked reserves in excess of required (i.e., calculated) levels – and that’s after using Q-factors to push up the required levels. The move to CECL will push up required loss reserves, but for many institutions that may still lie below the current actual reserve level.
- Regulators recognize that CECL implementation will vary widely. For large institutions, splitting probability of default (PD) from loss given default (LGD) will be expected, along with more powerful migration or vintage analysis approaches. Smaller institutions, on the other hand, should be able to build on their current ALLL methodology in order to satisfy regulators – e.g., still starting with historic loss rates, but looking back over a longer time horizon; still adding on Q-factor adjustments, but looking out over a longer (remaining life) horizon. However:
- More institutions will find vendor software worth considering – as much for managing the more onerous data expectations as for increases in complexity of calculations required.
We want to highlight an applicable banking blog post from last year: Scott Hodgins’ warning about Salesforce.com vanity projects. This topic is sure to become evergreen in the banking industry, as financial services is a heavily-targeted industry vertical for Salesforce CRM (customer relationship management).
Complexity bias, a cognitive bias in favor of complex solutions, is a possible cause for vanity projects. Design guru Don Norman explains one motivation behind our complexity bias: “We seek rich, satisfying lives, and richness goes along with complexity.”
Making things worse, increased knowledge increases the preference for complexity. When knowledgeable bankers attempt a vanity project or ‘big bang’ software implementation with hundreds or thousands of affected users, complexity bias may be at work.
Choosing a Salesforce platform for banking can be rational, but the following cost must be factored into a rational decision: The friction and effort for users across the bank or credit union to think in the Salesforce platform’s visual language and workflow. Users have long experience with the Microsoft platform’s visual language, thus Azure and Dynamics 365 deserve a look for that reason alone. Salesforce’s analytics and artificial intelligence efforts are exciting, but Microsoft has recently launched competing products and services.
Here at Global Wave Group, we strive to use a design language already familiar to Microsoft users. This familiar design language is infused into our new user interface release of version four of our flagship product Credit Track. Credit Track integrates easily with Salesforce CRM or Dynamics 365 for Sales. Salesforce has an open API that is painless for us to work with. Further, Credit Track includes a CRM designed specifically for commercial lenders, an alternative to general CRMs such as Salesforce Financial Cloud / Sales Cloud and Microsoft Dynamics 365 for Sales.
What’s the alternative to a vanity project or a big bang? As Hodgins says, in smaller or phased projects, vendors and executive sponsors are held accountable. We would add that in addition to holding vendors and executive sponsors accountable, users should be held accountable, but only if they are given a fair deal. Hold users accountable for adopting new software, in exchange for (a) disrupting their lives as little as possible and (b) procuring software that uses a familiar visual language.
While attending business school at Pepperdine University in Malibu, CA, President and CEO of Global Wave Group (GWG), Zubin Mehta was bitten by the entrepreneurial bug. After 18 years as a banker, he had seen firsthand the issues within the banking industry that needed attention. He had worked with redundant data entry, poor process flows, data integrity issues, and disparate systems. Mehta discovered he wanted to build a solution that would positively impact the banking industry by improving its processes and technology; however, he also deeply understood the regulations that would govern the project. Mehta built his business plan at Pepperdine and pitched it to his classmates resulting in three partners who helped him fund the venture. Together, they formed Global Wave Group— paying homage to Pepperdine’s mascot, the Wave.
GWG serves banks and financial institutions in two ways: through the Chief Information Officer (CIO) and the Chief Credit Officer (CCO). For the CIO, GWG’s fully compliant and secure platform helps in solving the challenge of ensuring continuous compliance with ongoing regulations while maintaining the security and stability of systems and infrastructure. For the CCO who is faced with increasing regulatory pressure and the need to ensure their banks are highly efficient with squeezed margins, “Our Credit Track is an end-to-end solution for commercial lending and commercial real estate lending that streamlines the process,” says Mehta. Credit Track platform allows bankers to start with their sales and marketing effort by leveraging the CRM component which can lead an opportunity through its origination within the platform. This in turn leverages analysis using the analytics module and allows the banker to underwrite the complexities of the loan. The system then allows the package to be presented for committee or credit approval using the bank’s unique credit policy which drives the business rules in the software. The application obtains documentation via a connection with most loan documentation systems and has a connection with the bank’s core loan accounting platform. Finally, the system tracks and monitors all portfolio metrics and generates dashboards and reports to support management decisions.
An example of GWG’s success with clients can be found in their work with an expanding Regional Bank with assets of approximately $7Billion. The Bank had undertaken a project to determine if they could use process automation to solve a series of efficiency issues that had begun to surface due to their rapid growth. GWG worked with a team of business representatives, IT, and other stakeholders to initiate requirements and functional design sessions. The success of GWG’s team and deployment enabled the Bank to achieve its overall objectives. The Bank expects reduction to their processing time by 70 percent leading to a ROI of less than a year.
Though GWG offers solutions built by bankers for bankers and deep industry knowledge, they believe their key differentiator is their focus on customer service. Each client is provided with a dedicated client relationship manager throughout the life of the relationship. Their implementation methodology is designed to execute on time and on budget every time. According to Mehta, “We build long-lasting relationships with our clients and enjoy an almost 100 percent retention or renewal rate. All our clients are referenceable. It’s always a great feeling when your clients refer to us as a “true partner” rather than just a “vendor”.
April 17, 2017 – (Aliso Viejo, CA) – Global Wave Group, the leading provider of workflow and loan origination solutions for the Banking Industry, is pleased to announce the release of its new Portal Solution that streamlines the document submission process for its Banking Customers. The Portal allows a Bank’s customers to submit loan documentation and related information in an automated, secure manner allowing Banks to gain further operational efficiencies. The Portal works seamlessly with Global Wave’s Credit Track solution; a web-based loan origination, workflow, approval, monitoring and reporting software platform that helps Bankers manage their loan portfolio and mitigate commercial lending risks. The origination process captures data points that are used throughout the loan life cycle, thus eliminating redundant effort and improving data quality. Credit Track helps in the monitoring and tickler process via tracking covenant conditions and required financial submissions. The application has a dashboard feature to track metrics as well as various levels of operational and management reporting. The platform is highly configurable and requires no programming knowledge to make workflow and operational changes.
Zubin Mehta, CEO of Global Wave Group added: “We are excited to be celebrating our 10 year anniversary and are thankful for all our great clients, partners and employees. Our clients continue to rely on our solutions, deep expertise and outstanding customer service to streamline their operations and workflow, and we believe that the Portal Solution continues to demonstrate our commitment to helping Financial Institutions serve their customers more efficiently.”
About Global Wave Group
Global Wave Group provides software and consulting services that enable banks to streamline their commercial credit process. Our management team brings together seasoned professionals in the financial services and technology industries. Our solutions are developed by Bankers, for Bankers. Learn more at www.globalwavegroup.com.
Global Wave Group
Zubin P Mehta