Banks Seek Outside Help on CECL Amid Economic Recovery

Mississippi-headquartered BancorpSouth Bank has joined the growing number of banks calling on external consultancies to assist with its handing of current expected credit loss (CECL) rules.

The bank has brought in specialist risk consultancy 4most to help it navigate the shifting risk landscape as the US recovers from the Covid-19 pandemic.

From December 2019, US lenders began accounting for credit losses on expected losses (the CECL model), while previously they were assessed on incurred losses.

UK-based 4most has a range of credit risk initiatives and provides insight and economic forecasting to lenders unsure of how to navigate market volatility.

“BancorpSouth, like all banks, is keen to understand the current risk environment and how that might change over the coming months as we emerge from the crisis,” said Keith Church, head of economics at 4most.

BancorpSouth and 4most have been working on a series of scenarios and analyses to “fully understand the immediate and emerging economic environment and be in a stronger position to assess threats and maximise opportunities”, Church added.

Banks across the US pushed for delays to CECL accounting rules in early 2020 as the pandemic took hold. However, rating agency KBRA argued that this would not have an impact on losses from defaulting loans.

When the first group of banks adopted CECL at the start of 2020, Federal Reserve data showed that reserves across the industry were either not affected or declined slightly, according to KBRA.

By December last year, banks were reducing the reserves they had set aside to soften expected loan losses from the Covid-19 pandemic, according to the Federal Deposit Insurance Corporation.

Now, banks are increasingly partnering with risk analysis firms to help them assess the longer-term economic impacts of the pandemic, particular on the outlook for their loan books.

Other areas under scrutiny include the labor market, wages and prices, household finances, and residential and commercial property prices.