To Better Understand Bank Real Estate Credit Concentrations, Give Your Portfolio a Workout

stress-test-4-19-17.pngBy now, the vast majority of banks with credit concentrations in excess of the 2006 Interagency Regulatory Guidance have discussed this with regulators during periodic reviews. To underscore the importance of this to the regulators, a reminder was sent by the Federal Reserve in December of 2015 about commercial real estate (CRE) concentrations. The guidance calls for further supervisory analysis if:

  1. loans for construction, land, and land development (CLD) represent 100 percent or more of the institution’s total risk-based capital, or
  2. total non-owner-occupied CRE loans (including CLD loans), as defined, represent 300 percent or more of the institution’s total risk-based capital, and further, that the institution’s non-owner occupied CRE loan portfolio has increased by 50 percent or more during the previous 36 months.

While the immediate consequence of exceeding these levels is for “further supervisory analysis,’’ what the regulators are really saying is that financial institutions “should have risk-management practices commensurate with the level and nature of their CRE concentration risk.” And it’s hard to argue with that considering that, of the banks that met or exceeded both concentration levels in 2007, 22.9 percent failed during the credit crisis and only .5 percent of the banks that were below both levels failed.

So the big question is: How to mitigate the risk? Just like the idea of having to fit into a bathing suit this summer can be motivation to exercise, the answer is to give your loan portfolio a workout.

And in this context, that workout should consist of stress testing designed to inform and complement your concentration limits. In other words, the limits you set for your bank should not exist in a vacuum or be made up from scratch, they need to be connected to your risk management approach and more specifically, your risk-based capital under stress. What’s necessary is to take your portfolio, simulate a credit crisis, and look at the impact on risk-based capital. How do your concentration limits impact the results?

For our larger customers, we find that a migration-based approach works best because the probability of default and loss given default calculations can come from their own portfolio and they can be used to project forward in a stress scenario (1 in 10 or 1 in 25-year event, for example). For our smaller banks or banks that do not have the historical data available, we use risk proxies and our own index data to help supplement the inevitable holes in data. Remember, the goal is to understand how the combination of concentrations and stress impacts your capital in a data-driven and defensible way.

Additionally, the data repository created from the collection of the regulatory flat files (the only standardized output from bank core systems) can be used for a variety of purposes. This data store can also be used to create tools for ongoing monitoring and management of concentrations that can include drill down capabilities for analysis of concentrations by industry, FFIEC Code, product/purpose/type codes, loan officer, industry and geography (including mapping), and many others. The results of loan review can even be tied in. The net result is a tool that provides significant insight into your portfolio and is a data-driven road map to your conversation with your regulators. It also demonstrates a bank’s commitment to developing and using objective analytics, which is precisely the goal of the regulators. They want banks to move past the days of reliance on “gut feel” and embrace a more regimented risk management process.

When the segmentation and data gathering is done well, you are well positioned to drive your portfolio through all sorts of different workouts. The data can be used for current allowance for loan and lease losses, stress testing, portfolio segmentation, merger scenarios and current expected credit loss (CECL) calculations, as well as providing rational, objective reasons why concentration limits should be altered.

And just like exercise, this work can be done with a personal trainer, or on your own. All you need is a well thought out plan and the discipline to work on it every day as part of an overall program designed for credit risk health.

Using Big Data to Assess Credit Quality for CECL

CECL-4-7-17.pngThe new Financial Accounting Standards Board (FASB) rules for estimating expected credit losses presents banks with a wide variety of challenges as they work toward compliance.

New Calculation Methods Require New Data
The new FASB standard replaces the incurred loss model for estimating credit losses with the new current expected credit loss (CECL) model. Although the new model will apply to many types of financial assets that are measured at amortized cost, the largest impact for many lenders will be on the allowance for loan and lease losses (ALLL).

Under the CECL model, reporting organizations will make adjustments to their historical loss picture to highlight differences between the risk characteristics of their current portfolio and the risk characteristics of the assets on which their historical losses are based. The information considered includes prior portfolio composition, past events that affected the historic loss, management’s assessment of current conditions and current portfolio composition, and forecast information that the FASB describes as reasonable and supportable.

To develop and support the expected credit losses and any adjustments to historical loss data, banks will need to access a wider array of data that is more forward-looking than the simpler incurred loss model.

Internal Data Inventory: The Clock is Running
Although most of the data needed to perform these various pooling, disclosure and expected credit loss calculations can be found somewhere, in some form, within most bank’s systems, these disparate systems generally are not well integrated. In addition, many data points such as customer financial ratios and other credit loss characteristics are regularly updated and replaced, which can make it impossible to track the historical data needed for determining trends and calculating adjustments. Other customer-specific credit loss characteristics that may be used in loan origination today might not be updated to enable use in expected credit loss models in the future.

Regardless of the specific deadlines that apply to each type of entity, all organizations should start capturing and retaining certain types of financial asset and credit data. These data fields must be captured and maintained permanently over the life of each asset in order to enable appropriate pooling and disclosure and to establish the historical performance trends and loss patterns that will be needed to perform the new expected loss calculations. Internal data elements should focus on risks identified in the portfolio and modeling techniques the organization finds best suited for measuring the risks.

External Economic Data
In addition to locating, capturing, and retaining internal loan portfolio data, banks also must make adjustments to reflect how current conditions and reasonable and supportable forecasts differ from the conditions that existed when the historical loss information was evaluated.

A variety of external macroeconomic conditions can affect expected portfolio performance. Although a few of the largest national banking organizations engage in sophisticated economic forecasting, the vast majority of banks will need to access reliable information from external sources that meet the definition of “reasonable and supportable.”

A good place to start is by reviewing the baseline domestic macroeconomic variables provided by the Office of the Comptroller of the Currency (OCC) for Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank stress testing (DFAST) purposes. Because regulators use these variables to develop economic scenarios, these variables would seem to provide a reasonable starting point for obtaining potentially relevant historic economic variables and considerations from the regulatory perspective of baseline future economic conditions.

Broad national metrics—such as disposable income growth, unemployment, and housing prices—need to be augmented by comparable local and regional indexes. Data from sources such as the Federal Deposit Insurance Corporation’s quarterly Consolidated Report of Condition and Income (otherwise known as the call report) and Federal Reserve Economic Data (FRED), maintained by the Federal Reserve Bank of St. Louis, also can be useful.

Data List for CECL Compliance


Looking Beyond Compliance
The new FASB reporting standard for credit losses will require banks to present expected losses in a timelier manner, which in turn will provide investors with better information about expected losses. While this new standard presents organizations of all sizes with some significant initial compliance challenges, it also can be viewed as an opportunity to improve performance and upgrade management capabilities.

By understanding the current availability and limitations of portfolio data and by improving the reliability and accuracy of various data elements, banks can be prepared to manage their portfolios in a way that improves income and maximizes capital efficiency.

Is Your Bank Ready for CECL?

CECL-12-28-16.pngConsidered by some bank accounting’s most significant change in 40 years, the FASB’s Current Expected Credit Loss (CECL) standard is inching toward reality.

Are you and your board colleagues studying the standard’s fundamentally new requirements for booking loan losses? Do you have a sense for its implications on reserves? Are you considering the penetrating questions to ask about management’s preparedness and processes to comply?

For some directors, the standard might seem straightforward: Build reserves to cover losses over the life of a loan. But it means much more: The timing of adding to the reserve has changed considerably. The entire expected lifetime losses must be booked in the quarter in which the loan is made.

Make no mistake; preparing to meet the demands of the standard, effective January 1, 2020, for most Securities and Exchange Commission (SEC) registrants, promises be a complex, time-consuming endeavor.

Other questions bank directors must ask themselves include whether they understand the standard’s implications and if they are confident that bank management is prepared for the formidable changes affecting modeling, data collection and analysis, calculation of losses, and information technology (IT) systems.

For some bank management teams, the answer may be a confident, “Yes.’’ For others, it might be a tentative, “Well … let us get back to you on that.’’

It is worth noting that 83 percent of bankers who answered a recent survey at the American Institute of Certified Public Accountants conference said they expected CECL to require substantial changes to banks’ policies, procedures and IT systems. Half said they were most concerned about how they would manage the amount of data needed to comply.

Consider this counterintuitive CECL scenario: the bank has a quarter it considers successful because of the number of new organically grown loans it made. But, it might show a quarterly loss because the bank must book expected losses for the entire life of those loans in the quarter in which the loans were made. Under current rules, banks book losses after they are incurred.

Further, when calculating expected losses under CECL, banks must incorporate reasonable and supportable forecasts in their loss evaluations. In other words, how strong are your bank’s modeling capabilities?

That forecast would include a bank’s expectation, for example, of the future yield curve and an expectation of the economic future over the life of the loan–and how these factors would impact the performance of each loan for the life of the loan.

For some banks, the timing issue could mean between now and 2020, they will need to add to their capital base through earnings. Capital planning considerations are most effectively dealt with when given sufficient lead time, especially if a number of institutions need to raise capital upon adoption of the standard.

Directors must prepare to challenge management’s process to meet the standard. That may mean that directors ask management if they’ve examined commercial loans by type or vintage, and if they’ve done preliminary lifetime loss calculations based on past experience and future economic considerations.

Consequently, directors need comfort that management has established a robust CECL planning process in order to know which data will be required. It’s no wonder, then, that for many directors, that standard looming on the horizon suddenly is getting closer.

Lending Automation: The Risk of Delayed Entry


Technology is rapidly enhancing the banking industry’s ability to comprehensively and efficiently evaluate the credit worthiness of businesses and consumers alike. The abundance of available information on borrowers and the effective management of big data enables banks to minimize risk, reduce defaults and maximize returns. The challenge is leveraging that data to realize its full potential value.

Data and technology go hand in hand. Banks already have a lot of great data on the customers they serve. The problem is, unless they take advantage of available technology, most banks won’t come close to maximizing the value of the customer information they have collected.

Only through technology can banks collect, aggregate and analyze massive amounts of data in a timely manner, allowing for quick, accurate decisioning of borrower information and the streamlining of the myriad of steps that make up the end-to-end lending process. Financial institutions that do the best job of adopting new financial technology stand to gain a huge competitive advantage over those that lag behind.

For those banks slow to adopt state-of-the-art lending technology, the risks of falling behind are significant. The failure to take advantage of the innovative resources available today puts the bank at a competitive disadvantage, and has negative impacts both financially and in terms of human costs.

Customers have grown to expect the convenience and speed that come with a digital experience and judge their financial institution by how it meets those technological expectations. As a result, customers are seeking out banks with a strong fintech brand. With both business and personal borrowers, one of the key drivers is the speed in which they can have access to the capital they need to solve their financial problems. Banks that respond the fastest typically have incorporated technology into the lending process. That results in increased customer retention and higher customer satisfaction scores.

Technology not only impacts the bank’s “customer experience,” it has a major impact on the quality of the “banker experience” as well. Technology enables bankers to focus their energies on activities that enhance their productivity. When customer data is quickly translated into actionable information, it allows bankers to ask better questions, solve more problems and meet more customer needs. This enhanced “banker experience” results in greater employee retention, loan portfolio growth and increased account penetration.

Efficiencies gained through technology also have a big impact on profitability. Loans that were once loss leaders are now able to be executed profitably. It costs just as much for a bank to take a $25,000 loan through the underwriting process as it does for a $900,000 loan. With the efficiencies gained through technology, smaller loans that were once loss leaders may now be executed profitably. This impact can best be seen in the critical small business lending space. Loans that have not been pursued by banks, and in some cases even turned away, are now able to be done profitably, which opens up new markets for banks and helps them better serve their local communities. Technology enables the collection, aggregation and analysis of data in a much more cost effective way and allows for automated, streamlined processes that enhance profitability.

Finally, regulators are also trending toward more comprehensive risk analysis and the expectation of predictive modeling as an objective way to make lending decisions and monitor loan portfolios. Current Expected Credit Loss standards (CECL) are being developed requiring “life of loan” estimates of losses. More and more, banks have to rely on their ability to manipulate available data as a way to meet the regulators’ demands. That kind of analysis is difficult to accomplish consistently and accurately using manual processes, but is much easier to achieve with technology.

Embracing financial technology is the key to survival in the lending world. Banks that adopt new lending technologies early will have significant advantages in the marketplace and will slow market share losses to aggressive, tech-oriented marketplace lenders.

The Board’s Role in the Transition to CECL

CECL-9-30-16.pngThis summer, the Financial Accounting Standards Board (FASB) completed its project on credit losses with the issuance of a new standard that brings one of the most significant changes to financial reporting that financial institutions have seen in decades: The incurred loss model for estimating credit losses will be replaced with a new model, the current expected credit loss (CECL) model. In many cases, the new credit loss calculations are expected to result in an increase in the allowance, and, thus, might have a significant impact on capital requirements. Banks will need sufficient time to prepare and adjust capital planning and capital management strategies.

Banks are educating themselves on the changes, and boards of directors should be aware of the challenges faced by the banks they oversee.

As with any major initiative, a successful transition to the new standard will require the active involvement of the audit committee, the board of directors, and senior management. Given the audit committee’s responsibility for overseeing financial reporting, it has a critical role to play in overseeing implementation.

Recently, speakers from the Securities and Exchange Commission’s (SEC’s) Office of the Chief Accountant have emphasized the role that audit committees should have in implementing new significant accounting standards. In his speeches at Baruch College and the AICPA Bank Conference, Wes Bricker, interim chief accountant, addressed CECL implementation. Likewise, the federal financial institution regulatory agencies have addressed the role of the board in implementing the new credit loss standard. The agencies issued a joint statement on June 17, and in March the Federal Reserve System (Fed) released an article, “New Rules on Accounting for Credit Losses Coming Soon.” The speeches, joint statement, and article highlight tasks that boards of directors and audit committees may consider during transition, including:

  • Evaluate management’s implementation plan, including the qualified resources allocated for execution.
  • Monitor the progress of the implementation plan, including any concerns raised by the auditors or management that might affect future financial reporting.
  • Understand the changes to the accounting policies that are required for implementation.
  • Understand management’s transition to any new information systems, modeling methodologies, or processes that might be necessary to capture the data to implement the standard.
  • Oversee any changes to internal control over financial reporting in transitioning to the new standard.
  • Review impact assessments of the new standards, including impact on financial statements; key performance metrics, including credit loss ratios, that might be disclosed to investors outside the financial statements; regulatory capital; and other aspects of the organization such as compensation arrangements and tax-planning strategies.
  • Understand management’s plan to communicate the impact of the new standard on key stakeholders, including the new disclosures required by the standards and disclosures made leading up to the adoption date. Those who file with the SEC will need to disclose information about standards effective in future periods, including the expected impact when adopted.

In evaluating management’s implementation plan, it is important to develop an understanding of management’s timeline for implementing the new standards and to be aware of the effective date. Recognizing that the definition of a public business entity (PBE) under FASB includes many financial service entities, the FASB split the definition to provide additional time for PBEs that are not SEC filers.

  • For PBEs that are SEC filers, the standard is effective in fiscal years beginning after Dec. 15, 2019, and interim periods in those fiscal years. For calendar year-end SEC filers, it first applies to the March 31, 2020, interim financial statements.
  • For PBEs that are not SEC filers, the standard is effective in fiscal years beginning after Dec. 15, 2020.
  • For all other entities, the effective date includes fiscal years beginning after Dec. 15, 2020, and interim periods in fiscal years beginning after Dec. 15, 2021.
  • Early adoption is permitted for all entities in fiscal years beginning after Dec. 15, 2018, and interim periods in those fiscal years. That means, any calendar year-end entity may adopt as early as the March 31, 2019, interim financial statements.

While those dates might seem somewhat distant, there really is no time to lose in preparing for the transition.

Does Your Bank Have the Stress Testing Data You Need?

stress-testing-8-26-16.pngThe next several years will increase the need for better data management at banks. Banks that have experienced the Dodd-Frank Act’s required stress tests (DFAST) already have encountered that need. With the Basel III international accord phasing in and the new current expected credit loss impairment standard (CECL) eventually taking effect, all U.S. financial institutions are facing ever more demanding regulatory requirements driving the need for enhanced data and analytics capabilities.

Credit data is becoming increasingly integral to stress tests, as well as capital planning and management and credit loss forecasts. To meet regulatory expectations in these areas, though, some banks need to improve the quality of their data and the control they have over it. Effective data management can bring valuable support and efficiencies to a range of compliance activities.

Expanding Data Requirements
DFAST, which is required of banks above $10 billion in assets, is highly dependent on data quality. The DFAST process—including scenarios, analytics, and reporting—requires banks to maintain a vast array of reliable and detailed portfolio data, including data related to assets and liabilities; to customers, creditors and counterparties; to collateral; and to customer defaults.

Under Basel III, banks will need to gather even more data. The requirements call for consistent data sourcing and reconciliation, liquidity management and the capture of data for historical purposes, among other things.

The Financial Accounting Standards Board’s new CECL model for GAAP reporting applies to all banks and will bring implications for data management. Banks and financial services companies will need borrower and economic data, exposure level data, historical balances, risk ratings and data on charge-offs and recoveries. Failure to capture quality data in these and other areas could result in tougher examinations, reliance on peer or industry data, questions about safety and soundness and drops in capital and profits.

Data Management Challenges
Small banks generally have a handful of credit data sources, while large banks can have 15 or more—and the number of sources is expected to grow in coming years as new products are released. In addition, the data often is stored in different formats and might not be subject to any governance or control. It’s no wonder that banks can find it difficult to get a handle on their data, let alone produce a “single source of truth” that can withstand examiner scrutiny.

One solution to this dilemma is a credit data warehouse. A data warehouse can provide a vehicle for controlling and governing an immense amount of data. It allows a bank to easily show an examiner the data that was used for its models, the data sources and how the data reconciles with the bank’s financial statements.

Banks might encounter some obstacles on their way to effective warehousing, though, including the sheer volume of data to be stored. Quality assurance is another common issue. For example, information might be missing or not in a standardized format. Data availability also can pose problems. A bank might have the required information but not in an accessible format.

Best Practices
Overcoming these problems comes down to data governance—how a bank manages its data over time to establish and maintain the data’s trustworthiness. Data management without active governance that is targeted toward achieving a single source of truth isn’t sustainable.

In the case of DFAST, it’s important to resist the temptation to take a short-term perspective that considers only the data required for stress testing. Banks that take a more global view, bearing in mind that the data is used throughout the organization, will fare much better. Such banks build a framework that can handle the new data requirements (including those related to historical data) that will surely continue to come in the future.

Banks also should remember that data management is not a one-off task. A bank might have clean data today, but that data will degrade over time if not managed on an ongoing basis.

Finally, banks should not overlook the human factor. Success isn’t brought about by a database but by the people who are stewards for the data and the processes put in place to audit, balance, and control the data. The people and processes will, of course, be enabled with technology, but the people and processes will make or break a data management program.

Time to Take Control
Effective data management is an essential component of any stress testing endeavor, but data management also has implications that extend to CECL and Basel III compliance and likely will aid banks in coping with many forthcoming regulations and requirements. Banks that don’t yet have control of their data should take steps now to establish the governance, framework and people and processes necessary to ensure the completeness, accuracy, availability and auditability of a single source of truth for both the short- and long-term.

Top Trends Impacting Audit Committees in 2016

audit-committee-6-10-16.pngIf you’re serving on an audit committee, congratulations. That may be the toughest and most time consuming committee of a bank board. If you find that it isn’t getting any easier, you’re not alone.

As Bank Director gears up for next week’s Bank Audit & Risk Committees Conference in Chicago, we spoke to accountants and consultants who advise banks on the biggest trends impacting audit committees this year.

Audit committees are clamoring to learn how to be more strategic. Jennifer Burke, a partner at Crowe Horwath LLP, says she gets lots of questions from audit committees about how they should focus more on big picture issues, and not get bogged down in all the details. They have the usual responsibilities: supervising an internal auditor, hiring an external auditor, reviewing audits and following up to make sure problems are fixed, but they have a lot more to keep track of as well, including a widening array of new regulations and accounting pronouncements, as well as, in some cases, risk management and cyber risk issues. “It’s not easy to be on an audit committee these days,’’ she says. “There’s not a box to check to make sure your bank will survive.”

Audit committees will begin asking questions about the implementation of Financial Accounting Standards Board (FASB)’s new standard on loan loss impairment. The organization is expected to publish final rules in the next week or two for what’s known as the Current Expected Credit Loss Impairment Model (CECL). “It’s the biggest accounting change for banks we’ve seen in a decade,’’ says Carol Larson, a partner at Deloitte & Touche LLP. Under the current incurred loss model, banks reserve for loan losses based on incurred losses. Under CECL, which is expected to go into effect in 2020, banks will have to reserve for estimated losses over the life of the loan, based on the experience with other, similar types of loans. As soon as a bank makes a loan, it will likely have to record a reserve for that loan. “Banks don’t like this model we’re moving to,’’ Larson says. “It’s going to significantly increase their reserves. You can imagine regulators really like it a lot.” Since banks will want to run the new model for a year in advance of the rule going into effect, Larson suggests banks should try to have a concrete plan and timeline for implementation this fall.

Audit committees increasingly burdened with bank-related compliance issues are trying to be more efficient. Larson says boards often hand over compliance-related problems and oversight of new regulations to audit committees, which have seen such work escalate since the financial crisis. It used to be fairly uncommon for a bank to get hit with a regulatory “matters requiring attention” notice. Now, it’s fairly common for a bank to have 20, Larson says. “It’s mind numbing on some level,’’ she says. It’s fair for an audit committee to ask questions not just about adding employees to the compliance department, but how to add them efficiently. Perhaps the old way of doing business is no longer the most efficient way, and data analytics could help banks in some ways handle the compliance burden effectively.

Cyber risk is a huge concern. Bank boards are worried about cyber security, there’s no doubt about it, and much of this oversight is handled at the audit committee level, especially for smaller banks. About 28 percent of bank audit committees handle cyber risk in the audit committee, with smaller banks more likely to handle this in audit than banks over $5 billion in assets, according to Bank Director’s 2016 Risk Practices Survey. A good practice is not to assume you can plug every leak, but to get prepared for the almost inevitable data breach, Larson says. Just like a natural disaster, data breaches aren’t necessarily preventable, but you can prepare with a good disaster plan.

New Accounting for Credit Impairment and Equity Securities: What You Need to Know

4-10-15-Crowe.pngSince the financial crisis, the Financial Accounting Standards Board (FASB) has been debating wholesale changes to the U.S. generally accepted accounting principles (GAAP) financial instruments model in two related projects. For the first of the financial instruments projects, the FASB wrapped up in January the bulk of its deliberations on the classification and measurement project and expects to issue a standard in mid-2015. The FASB has come full circle by largely retaining existing GAAP—which means the legal form drives the classification and measurement of financial instruments, namely securities and loans.

However, it will not be business as usual when the new standard goes live for financial institutions. There will be a handful of changes that affect financial institutions, the largest being the requirement for equity securities with readily determinable fair values to be carried at fair value through net income (FV/NI) rather than today’s option to carry them at fair value through other comprehensive income (equity method securities will not be FV/NI).

Of greater interest is the second project: credit impairment. The FASB completed the majority of its deliberations in March and expects to issue a final standard in the third quarter of 2015. This standard, which uses the current expected credit loss (CECL) model, fundamentally will change the way the allowance for credit losses is calculated. The standard will have a pervasive impact on all financial institutions, and questions are circulating about what changes are in store.

What Instruments Are Subject to CECL?
The FASB decided to apply CECL to financial assets measured at amortized cost. For financial institutions, CECL generally will apply not only to loans but also to held-to-maturity debt securities and loan commitments that are not classified at FV/NI.

How Is the Allowance Measured Under CECL?
A current estimate of all contractual cash flows not expected to be collected should be recorded as an allowance. When developing this estimate, institutions also need to consider reasonable and supportable forecasts of the cash flows for the financial asset’s life. Given that CECL effectively is a lifetime estimate, institutions will need to estimate the life of the asset by considering the contractual term adjusted for expected prepayments but not considering renewals or modifications unless the entity expects to execute a troubled debt restructuring (TDR). This new focus on payment speeds outside of an ALM calculation might be a challenge for some financial institutions in terms of both data availability and capability.

The FASB is focusing on making CECL as flexible as possible and is retaining other items that had been incorporated in the incurred loss model. For example, the allowance calculation still includes “relevant quantitative and qualitative factors” based largely on the business environment and similar factors that relate to their borrowers (such as underwriting standards). However, the CECL model is different from today’s incurred loss model because it removes the “probable” threshold and accelerates the recognition of losses.

What Are Some Other Changes?

  • Purchased Credit-Impaired (PCI) Assets. The FASB is changing the definition of PCI and generally is simplifying the PCI model overall to require immediate recognition of changes in expected cash flows.
  • TDRs. At modification, an adjustment will be recorded to the basis rather than as an allowance.
  • Disclosures. The FASB retained the current disclosures with a few additions. For example, the FASB tentatively decided to require credit quality disaggregated by asset class and year of origination (in other words, vintage), subject to staff outreach.

What About Transition?
Once the standard is adopted, there will be a cumulative-effect adjustment to the balance sheet (credit allowance, debit retained earnings). For debt securities with recognized impairment, previous write-downs are not reversed. For PCI assets, an allowance is established with an offset to cost basis.

What Is Next?
At the March 11, 2015, meeting, FASB staff received permission to begin drafting the standard. The FASB will discuss at a future meeting any remaining issues identified during the drafting process, cost-benefit considerations and effective date.

What Does My Financial Institution Need to Do Now?
Top on the list for any financial institution is to begin to think about what data would be necessary to develop better forward-looking estimates of expected cash flows and whether that data currently is being retained.