Where are we today?
While larger community and regional banks are well attuned to the regulatory guidance on model risk management and have established policies and procedures to comply with the guidance, implementation for many of the banks below $10 billion in assets is still a work in progress. In regard to the new current expected credit loss (CECL) accounting standard, most of the effort to date has been focused on how to implement the standard, what type of modeling technique(s) to use, whether to develop or purchase a model, how to manage the data and the implementation of the new standard. However, if your organization is greater than $1 billion in assets, your new CECL model(s) will need to be validated prior to adoption of the standard, which is effective in 2020 for SEC filers and 2021 for other entities. The following are DHG’s views on specific items that you should consider and document as you move forward to ensure that your organization’s CECL model, and surrounding processes, are ready for validation prior to the model(s) entering production.
Where to start?
The initial guidance of the Supervisory Guidance on Model Risk Management was issued jointly by the Board of Governors of the Federal Reserve System (FRB) and Office of the Comptroller of the Currency (OCC) in 2011 with supervisory letter SR 11-7 (FRB) and Bulletin OCC 2011-12 (OCC), so the guidance is not considered “new” in the industry. What is relatively new, however, is the adoption of this guidance by the Federal Deposit Insurance Corporation (FDIC) with Financial Institution Letter FIL-22-2017, which brings the guidance downstream to all FDIC regulated institutions with assets of $1 billion and greater. The 2011 guidance adopted by this FIL was clear and concise; however, there are many “to-do’s” embedded within the guidance.
Robin Sawyer, CPA
Partner, DHG Financial Services
Alan Hodgson, CFA
Director, DHG Financial Services
Allison Tanju, CPA
Senior Manager, DHG Financial Services
Manager, DHG Financial Services
About DHG Financial Services
DHG Financial Services professionals provide you with in-depth industry knowledge and a wide range of advisory, assurance and tax services to address issues facing your industry in today’s challenging environment. For more information, visit dhg.com/financial-services.