Director Responsibilities Regarding CECL

By Larry D. Sherrer, Senior Examiner and Accounting Risk Chair, Federal Reserve Bank of St. Louis

1/14/2020

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DISCLAIMER: This article is intended to discuss the CECL standard relative to its application to banks, particularly state chartered banks that are members of the Eighth Federal Reserve District. It is intended solely as a reference and resource for those banks. The article does not represent official supervisory policy.

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The overall responsibilities of the directors of financial institutions for overseeing effective financial reporting and internal controls will not change with the implementation of the CECL standard. However, directors do need to be prepared to review a broader range of data and information beyond what has been previously used to estimate the allowance for credit losses. 

Some financial institutions may seek CECL implementation assistance from outside parties, such as independent accountants, data processing firms or consultant, although they not required to do so. However, directors cannot delegate their responsibilities to others outside the organization.1 What directors can do is to put a plan in place to monitor management’s progress in achieving critical CECL implementation milestones.

While directors should continue to delegate the day-to-day activities of the transition to management and staff, the boards of some institutions might find it helpful to have a separate audit or credit committee to focus on key CECL oversight objectives, while the full board retains a more general oversight role. 

Regardless of the choice of oversight method, it is essential for directors to ensure they continue to receive appropriate summaries, reports, and supporting documents that facilitate meaningful discussions with management, qualified staff and independent parties. This is particularly essential given that community banks have until 2023 to implement the new standard. For example, directors should be kept apprised of key dates, including Day 1 implementation, parallel run schedules, etc.  

Take Stock Now

Financial institutions and their directors should consider “taking stock” of where they are at now with their process for estimating credit losses, keeping in mind that “one size does not fit all” for achieving CECL readiness. For example, they should feel comfortable that the adoption of complex modeling is not required by the CECL standard. Indeed, many institutions will likely leverage existing methodologies and build them out to comply with CECL, rather than to make substantial wholesale changes. In the end, this is a decision each institution will need to make. 

Regardless of complexity, directors should understand how their institutions’ respective methodologies will impact their organizations. Here is a list of questions directors might consider asking: