WHITE PAPER
Effective CECL Adoption Timelines Confirmed:
Expected Cost of Implementation
Incorporating Cost Analysis in the Overall Transition
fintellix.com | ardmoreadvisors.com
COMMUNITY BANKING SOLUTIONS
COMMUNITY BANKING SOLUTIONS
“The Ardmore/Fintellix team really
knows their CECL stuff. Not only are
they a pleasure to work with, but I was
impressed with their ‘quant’ abilities
and the process even helped me learn
more about the capabilities of my
bank’s core system to address the data
needs of CECL.”
Deb Evans, CFO
Bank of Lancaster,
Kilmarnock, Virginia.
On Nov 11th, FASB decided the effective dates of adoption for the CECL guidelines. For
staggering the dates of adoption for financial institutions (FI) of various sizes, FASB took a
different approach from asset size range and used the definition of public business entities (PBE).
• Dec. 15, 2018, including interim periods – For PBEs which are SEC Filers
• Dec. 15, 2019, including interim periods – For PBEs which are non-SEC Filers
• Dec. 15, 2020, including interim periods – For all other entities
The final guidelines on CECL are expected in Q1 2016. For the first adoption date, FIs have eleven
quarters to take the necessary action for a successful transition. Given that even the regulators
view the transition from the current “incurred” loss models to “expected” loss model as not just
a tweak but a fundamental change, it is important for FIs to begin the impact estimation process
early and plan for this change.
In our previous paper “Effective CECL adoption timelines confirmed: How to start preparing now”
we saw the steps an FI needs to undertake for a successful transition.
In this paper, we analyze the entire implementation process and define the cost items that need
to be analyzed. Moreover, based on our previous comparable experiences, we have assigned a
dollar value which is a function of size, complexity and implementation options to each cost item
and we use this to take a look at overall indicative cost.
• FASB is trying to make things
easier to understand and less
complex to implement
Implementation Options Available
For any transition required for a regulatory change, FIs have three options: build in-house, buy a
vendor solution or outsource to a third party.
• Do not rush into building CECL
models as soon
Option 1: In-house Build: The FI decides to build the new models, create the infrastructure to
• Three options available to banks
for implementation:
itself.
o Build In-house
o Buy a vendor solution
o Outsource entire calculation to
a Third Party
acquire and store data from the source systems and perform all project management activities by
Option 2: Vendor Solution: The FI buys a third party solution. For ease of understanding, we have
assumed that it is a hosted solution rather than an on-premise one (to reduce the infrastructural
cost).
Option 3: Third Party Outsourcing: The FI decides to outsource the entire process to a third party
vendor where the FI provides the files downloaded from the core system and the third party
performs the calculation every quarter.
Cost Items to Consider
Each bank has its own set of complexities and diversities. An ideal yardstick to differentiate
between the complexities is the size of the institution. We analyzed* a set of cost items that
would remain constant, irrespective of the size of the bank and another set of cost items that
would change with the size of the bank.
*Assumptions
a) There are only three options available as mentioned in the previous section
b) Indirect (I) costs are calculated based on time spent on an activity and Direct (D) costs are dollar amount allocated to an
activity
c) There might be a few cost items which are irrelevant to a few banks
d) Cost of management time spent during business-as-usual and Cost of employee time associated with the ALLL calculation
are included as an assumption
e) Vendor solution and third party outsourcing vendors would provide pre-built CECL models with external data capability
and prepayment inclusion option
f) Capex: One time investment required by the FI on transition to CECL; Opex: Cost which the FI is expected to incur on a
yearly basis
g) All Opex are mentioned as expected expenses over a one year period
h) Operational costs are forecast for a five year period
i) The average one person day cost is assumed as $350 and the interest rate to discount future costs is 3%
j) The cost of current ALLL is approximate and may vary from bank to bank
k) There are no Capex costs involved in the current ALLL process
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COMMUNITY BANKING SOLUTIONS
Costs that would Remain Constant with the Size of Bank
Activity
Capex
(one time
cost)
Opex
(per annum
cost)
Build Model
I
Data Identification – Missing /
External Data
I
Pushing Missing / External Data
into Model
I
Solution Validation / Certification
D
Audit & Examination
I
Regulatory Change Management
I
Business Change Management
I
External Data Subscription /
Maintenance
D
Management Attention
I
Description
CECL model inherently would be different from currently used historical loss rate
method. FIs need to hire a risk analyst if similar model building capabilities are
unavailable within the organization. The cost to build the CECL models (time spent by
a risk analyst) is taken into account under this cost item.
CECL would require banks to use external data. There are certain data points which
are unavailable in the core systems. The activity of identifying this data is a joint effort
required with the core vendors and solution providers.
The missing/external data identified has to be made useful for the CECL models.
Activities such as data cleansing, data validation and data transformation have to be
performed before the data can be made usable for CECL models.
The CECL models would be validated by external auditors or third party.
With CECL, the reporting and documentation requirements during the audits and
examination would undergo changes. FIs need to put extra efforts to generate
additional reports and documents during the regular audits & examinations.
Regulations keep changing and FIs need to be on top of all regulatory changes. FIs
need to spend time not only to understand the regulatory changes but also how to
implement them.
Introducing a new product line or introduction of new policies, might require changes
to existing models. Though, this is not a regular activity but, for a better estimation it
was considered as one of the operational expenses.
For external data, FIs might be required to subscribe to an external data provider or
maintain the data in-house. The FI would either pay annual/monthly subscription fees
or spend effort to update/maintain the in house database regularly.
The management not only has to put efforts to validate ALLL calculated on a
quarterly basis, but also has to approve any changes to the models/processes based
on regulatory or business changes.
Current ALLL
Option 1
Option 2
Option 3
Build model
NA
30K – 40K
NA
NA
Data Identification – Missing /
External Data
NA
6K – 10K
6K – 10K
6K – 10K
Pushing Missing/External Data
into Model
NA
3K – 5K
3K – 5K
3K – 5K
Solution Validation / Certification
NA
10K – 12K
NA
NA
Audit & Examination
NA
3K – 6K
NA
3K – 6K
3K – 6K
3K – 6K
NA
3K – 6K
NA
~2K
NA
NA
3K – 6K
3K – 6K
~1K
~1K
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Capex
(one time
cost)
D/I
Business Change Management
Opex
(per annum
External Data Subscription /
cost)
Maintenance
Management Attention
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COMMUNITY BANKING SOLUTIONS
Costs that would Vary Based on Size of Bank
Activity
Capex
(one time
cost)
Opex
(per annum
cost)
D/I
Project Management
I
Data Identification – Core Data
I
Core to Model Linkage
I
Solution Set-up
I
Infrastructure Set-up
D
Operational Effort
I
Ongoing Project Management
I
Quarterly Calculation and
Validation
Ongoing Infrastructure Cost
Financial Statement Reconciliation
and Reporting
I
The time spent on data validation, ALLL calculation/validation and approval.
D
Solution Services Costs
I
Amount spent on database maintenance, core system interface maintenance, etc.
Effort and time spend on building ALLL related disclosures (regulatory, internal,
board) and reconciling the financials with calculated ALLL.
Subscription or service cost an FI would incur if it goes for a vendor solution or third
part outsourcing as an option.
Option 1
Option 2
Option 3
Project Management
NA
7K – 10K
~2K
~2K
Data Identification – Core Data
NA
7K – 10K
3K - 5K
3K - 5K
Core to Model Linkage
NA
10K – 15K
10K – 15K
10K – 15K
Solution Set-up
NA
NA
3K – 5K
NA
Infrastructure Set-up
NA
10K – 15K
NA
NA
3K - 5K
3K - 5K
3K - 5K
3K - 5K
~1K
3K - 5K
~1K
~1K
5K – 10K
5K – 10K
5K – 10K
5K – 10K
Ongoing Infrastructure Cost
~2K
~2K
NA
NA
Financial Statement
Reconciliation and Reporting
2K – 4K
2K – 4K
~1K
~1K
NA
NA
30K – 40K
20K – 30K
Operational Effort
Ongoing Project Management
Opex
(per annum
cost)
I
Current ALLL
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Capex
Description
Approximate time spent by Internal Transition Group (ITG) on pooling, ALLL
methodology confirmation, TDR and impaired loan policy, reporting and
documentation and extensibility.
The most important aspect of CECL transition. The Data Focus Group (DFG) works
with the core system vendors to identify the data elements and history as required for
all requirements laid down during the project management stage.
A one-time activity to create a data cleansing algorithm, retrieval mechanism and
transformation logic to move core data into a credit mart to make it usable for all
upstream requirements.
The cost of setting up a solution, if the financial institution decides to buy a vendor
solution.
The cost of setting up hardware (e.g. infrastructure for a credit data mart if required).
Or, if the core vendor charges you for setting up the interface to retrieve data.
On a monthly/quarterly basis, data has to retrieved from the core system (directly/
interface). The core vendor might charge on a per file download basis.
As CECL would require more collaboration between departments (business, risk,
finance, credit), the time spent on project management activities for sufficient flow of
information across departments would be higher than current process.
Quarterly Calculation and
Validation
Solution Services Costs
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COMMUNITY BANKING SOLUTIONS
Ideal Scenario: Overall Cost of Implementation
“Ideal Scenario” is an important concept to understand before we take a look at the actual cost of
implementation. Some of the ideal scenario assumptions are a) If a bank decides to opt for an in-house build, the required skills to build the model are
available in-house or the FI can easily find a resource at an expected cost in the market.
b) All data elements identified by the Data Focus Group are available in the core systems and the
FIs get a clean, formatted file.
c) The existing ALLL process forms the base for future CECL requirements. E.g. The FI has a
reporting tool which can churn current ALLL reports as and when required. The regulatory
reports pertaining to ALLL and delinquencies are reconciled during the ALLL calculation
process itself.
d) FI currently calculates ALLL using Migration Analysis - the building block for CECL
methodologies.
e) FI currently takes a monthly download of granular data (loan level) from the core systems.
I. Key Findings for Banks with Asset Size < $ 1Bn
Best Option Available: Outsourcing (31% lower than In-house Build)
• “Ideal Scenario” is an important
concept to understand
• Compare the expected cost of
transition with the existing ALLL
spend
• Think about both Capex and
Opex
A Few Inferences:
• Yearly cost (5 year operational cost / 5):
Current ALLL Option 1
Option 2
Option 3
~25k
~39k
~35k
~33k
ALLL (~100k) required
Option for
1 in-house build
Option
2 primarily due
Option
3
• Current
Huge Capex
option,
to model
building
activities and the time spent on data identification and core vendor discussions.
• Capex involved in vendor solution and outsourcing are approximately the same and lower
~28k
~42k
~42k
~41k
than the Capex in the in-house build option, as for both the options the models would be
available with a list of all data elements (required in the model).
• Although outsourcing ALLL calculations would seem to be the most plausible option, there
Current ALLL Option 1
Option 2
Option 3
could be several benefits derived from using a vendor product like the availability of a pre-built
industry-grade data model, roadmap for transition to CECL, extensibility to other solutions
and keeping up to date with regulatory changes.
~31k
~46k
~49k
~56k
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COMMUNITY BANKING SOLUTIONS
II. Key Findings for Banks with Asset Size between $ 1Bn - $ 2Bn
Best Option Available: Outsourcing (28% lower than In-house Build)
A few inferences:
• Yearly cost (5 year operational cost / 5)
• Best Options available for banks
with asset size:
o < $ 1Bn: Outsourcing to Third
party
o US $ 1Bn – 2Bn: Outsourcing
to Third Party / Vendor Solution
o US $ 2Bn – 5Bn: Buying Vendor
Solution
o US $ 5Bn – 10Bn: Buying
Vendor Solution
• The on-going spend on future
ALLL activities (post CECL) will
not be significantly more than
current spend
• Huge Capex (~110k) required for in-house build option, primarily due to the model building
activities and the time spent on data identification and core vendor discussions.
• Capex involved in vendor solution and outsourcing are approximately same and lower than
the Capex in the in-house build option, as for both the options the models would be available
with a list of all data elements (required in the model).
• Although outsourcing ALLL calculations would seem to be the most plausible option, there
could be several benefits derived from using a vendor product like the availability of a pre-built
industry grade data model, roadmap for transition to CECL, extensibility to other solutions and
keeping up to date with regulatory changes.
III.Key Findings for Banks with Asset Size between $ 2Bn - $ 5Bn
Best Option Available: Vendor Solution (20% lower than In-house Build)
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COMMUNITY BANKING SOLUTIONS
A Few Inferences:
• Yearly cost (5 year operational cost / 5 )
• Huge Capex (~120k) required for in house build option, primarily due to the model building
activities and the time spent on data identification and core vendor discussions.
• Capex involved in vendor solution and outsourcing are approximately same and lower than
the Capex in the in-house build option, as for both the options the models would be available
with a list of all data elements (required in the model).
• Opex for a vendor solution is lower than outsourcing option, primarily due to lower efforts
required from FIs’ employees on operational activities, project management and quarterly
calculations and validation.
• An end to end vendor solution could help create a complete data repository to cater to the,
data extensiveness and product richness of this segment.
IV.Key Findings for Banks with Asset Size between $ 5Bn - $ 10Bn
Best Option Available: Vendor Solution (12% lower than In-house Build)
A Few Inferences:
• Yearly cost (5 year operational cost / 5)
• Huge Capex (~130K) involved in the in-house build option, primarily due to the model building
activities and the time spent on data identification and core vendor discussions.
• Capex involved in vendor solution and outsourcing are approximately the same and lower
than the Capex in the in-house build option, as in both the options the models would be
available with a list of all data elements (required in the model).
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COMMUNITY BANKING SOLUTIONS
• Opex for a vendor solution is lower than outsourcing models, primarily due to lower
efforts required from FIs’ staff on operational efforts, project management & quarterly
calculations and validation.
• An end-to-end vendor solution helps create a complete data repository to cater to the
product spread, data extensiveness and complexities of this segment.
Noise Factor and Extrapolating for Your Bank
As mentioned, the estimated costs for each category of banks is only for an ideal scenario.
These numbers have to be estimated for each bank individually, based on actual data
conditions, processes and methodologies.
What are the noise factors a bank must consider to extrapolate a cost estimate for
itself keeping the “ideal scenario” as baseline? We would tie it back to our previous paper
“Effective CECL adoption timelines confirmed: How to start preparing now”
During the initial project management activities, the Internal Transition Group (ITG) and Data
Focus Group (DFG) must study the contrast between the current state and the end state
using the parameters below I. Data
a) Once the FI has decided on the pooling methods and what methodology suits which
• No bank is an ideal scenario bank
• Analyze existing data, process and
methodology for current ALLL
activities
pool, it can refer to the data elements required for CECL and compare against the data
elements currently being used for ALLL (or other purposes). Essentially, the FI needs
to consider all data elements that have been sourced from core systems (ALLL, MIS
reporting, Regulatory reporting, Risk management, etc.).
• Rate your bank
b) Check how much history is currently available.
• We expect an increase of around
2.0x-2.5x for a bank with very
high deviation from ideal scenario
bank
c) Check the quality of data available from core systems.
II. Process & Methodology
a) Re-look at the existing ALLL processes.
b) Revisit the existing policies of identifying a TDR and calculating ALLL for TDRs. Many
FIs currently refrain from using the NPV method for ALLL calculation. Moreover, with
flexibility to use CECL calculation methodologies for TDRs, examine how pooling can
be done for TDRs.
c) Is the existing reporting (Regulatory, MIS, Board, etc.) automated? CECL will
require several changes to all reports pertaining to ALLL and if the current set-up is
spreadsheet-based (non-automated), then FIs need more focus and time spent on
reporting.
d) Is the current methodology Migration Analysis? If yes, then score yourself higher on
the scale.
Based on the above comparison of the current state and the end state, FIs should rate
themselves on a scale of 1 to 5 (1 being the lowest and 5 highest). Ardmore and Fintellix
have helped banks get this CECL readiness rating using a proprietary tool. We expect a
maximum of 2x – 2.5x increase in cost from ideal scenario (2.5x for an FI which rates itself
1 or below).
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COMMUNITY BANKING SOLUTIONS
An early start is vital, not just from the perspective of preparation, but also the understanding
and inclusion of the cost implications. FIs need to carefully consider both the Capex as well as the
Opex for the overall implementation. For an in-house build, the Capex would be on the higher
side for all categories (irrespective of the size), primarily due to the CECL Model building exercise,
data identification activities and infrastructural requirements. On an on-going basis however, the
cost of maintenance would be on the lower side, when compared to the other available options.
FIs have to decide on this “Capex-Opex trade-off” before embarking on the actual transition.
Moreover, the on-going annual spend on ALLL activities, when compared to current spends,
would not be impacted as much in any of the options, as we expect the same to increase by ~$ 8K
- ~$ 40K (minimum and maximum from the available options). So FIs are not likely to incur large
spends on an annual basis for ALLL-related activities.
FIs need to allocate an optimum budget for CECL transition, keeping in mind options available,
cost benefits from each option and other tangible-intangible benefits of the chosen option.
Obviously, the budget estimation cannot be complete without a thorough gap analysis
of existing data, process and methodology against the expected guidelines. The Capex
requirements would be significantly impacted based on the FIs CECL readiness score. FIs
therefore need to view the CECL transition neither as a modelling exercise nor a tweak to the
current foundation. A firm plan of action and precise preparation will help FIs sail through the
eleven quarter transition period easily.
About the Author:
Sourav Sekhar, Product Manager, Fintellix Solutions.
Sourav is a Product Manager at Fintellix Solutions where he conceptualizes and drives the implementation of risk and analytics
technology solutions for Banks. His product portfolio includes ALLL, Credit Portfolio Management and Regulatory Reporting. His
extensive knowledge of banking operations, risk and technology helps design and deliver an integrated approach for automating
and implementing solutions around regulatory requirements and strategic initiatives. His prior experience as an investment banker
at Deutsche Bank and as a banking technology consultant for HSBC, Americas involved advising banks and financial institutions on M&As
and implementing core banking solutions. His perspectives have been published in prominent journals including Community Banking Insights,
International Banker, Financial IT, Analytics India Magazine and BFSI Vision. Sourav is a Mechanical Engineer from the National Institute of
Technology, Warangal, India and an MBA in Finance from the Indian School of Business, Hyderabad, India.
About Fintellix Community Banking Solutions and
Ardmore Banking Advisors
Standardization of banking supervision is driving change across
the banking industry globally, especially considering enhanced
financial reporting, risk measurement and management. These
initiatives have been steadily expanding the regulatory burden
on community banks and increasing the cost of regulatory
compliance. The Ardmore - Fintellix alliance addresses the
need for a comprehensive solution that can help community
banks more easily manage their regulatory compliance needs,
and enable bank management to focus on business growth
and profitability. The Fintellix - Ardmore partnership delivers
a unique ‘global/local’ alliance that combines global expertise,
local experience, and next generation technology solutions to
lower the cost of compliance for community banks. Through
this alliance, community banks have the advantage of a
CECL-ready ALLL solution powered by a comprehensive credit
data warehouse as Software as a Service (SaaS). Ardmore’s
seasoned credit professionals ensure that the ALLL solution is
tailored for each bank’s specific needs and business model.
Fintellix Solutions Inc., 70 East Sunrise Highway, Suite 522, Valley Stream, NY 11581.
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