TCT Risk Solutions, LLC has the tools to help credit unions prepare for what may be the most critical regulatory change in two generations.

Your credit union will be impacted by CECL

CECL will have a significant impact on many credit unions in their operations and their profitability. Surveys show that approximately 75% of financial institutions have not prepared for CECL. CECL takes effect the end of 2020.

Your credit union is expected to account for the risk in its loan portfolio

Credit unions need to accurately and consistently account for the risk in their loan portfolios and make necessary placements to their ALLL according to GAAP on a regular basis. CECL changes how credit unions have been traditionally performing this process.

You will need to change how you calculate loan loss reserves

CECL rules are expected to change how credit unions, banks and other financial institutions calculate their credit loss reserves. CECL is expected to alter credit operations as well. CECL encourages financial institutions to take a “forward-looking” approach to loan instruments and recognize possible credit losses earlier. CECL will apply to loan commitments, financial guarantee contracts, reinsurance receivables, leases, trade receivables, as well as debt instruments.

“Incurred loss” methodology” to “forward looking” methodology

Financial institutions are expected to switch from an “incurred loss” methodology for reserving for loan losses to a method that is “forward looking” (predicting the future). Experienced managers know that predicting future events is troublesome and hazardous to say the least. But, predicting the future using “forward looking” methodologies for reserving for loan losses is the basis of CECL. The challenge for managers in accurately reserving for loan losses using “forward looking” approaches is in creating statistically valid and reliable models.

Several different methodologies are accepted but one is best

Currently, CECL is not based on a specific calculation required to meet today’s standards. Many in the financial industry are looking at three methods in particular: credit migration analysis, vintage analysis and probability of default/loss given default (PD/LGB). We at TCT believe through experience and research that Credit Migration Analysis is the most useful and beneficial method for credit unions to forecast loan losses. That is why TCT has focused on providing one of the most effective Credit Migration management tools in the marketplace.

Don’t wait – prepare now

Credit unions will be scrambling to find loan loss modeling tools that meet CECL guidelines. Whether they develop their own or find and implement a model from an outside source, CEOs and boards could find the process daunting. Furthermore, Asset/Liability Management modeling will become more challenging once CECL is implemented.

TCT’s Credit Migration model and TCT’s A/LM model have been reviewed by CPA firms specializing in credit union regulations and found to be compliant with CECL. Very few competitors offer loan loss prediction models that already meet CECL guidelines.

Through years of research and back testing, TCT has created a statistically validated and reliable Credit Migration model that predicts loan losses and establishes amounts to be set aside in Allowances for Loan and Lease Losses.

Learn more about TCT’s Credit Migration management tool by attending our March 15 webinar titled: What Is Interest Rate Risk (IRR) or for a more comprehensive look join Randy & VirtualCorps.com on March 14 for ALM: Comparison of Earnings at Risk (EAR) to Value at Risk (NEV)