Banks ask for external aid for the CECL in a context of economic recovery

Mississippi-headquartered BancorpSouth Bank has joined the growing number of banks using outside consultants to help them meet current expected credit loss (CECL) rules.

The bank enlisted the help of risk consultancy firm 4most to help it navigate the changing risk landscape as the United States recovers from the Covid-19 pandemic.

From December 2019, US lenders began to account for credit losses over expected losses (the CECL model), whereas previously they were valued on incurred losses.

UK-based 4most company offers a range of credit risk initiatives and provides economic information and forecasting to lenders unsure of how to handle market volatility.

“BancorpSouth, like all banks, is keen to understand the current risk environment and how this could change in the coming months after the crisis emerges”, said Keith Church, head of economics at 4most.

BancorpSouth and 4most worked on a series of scenarios and analyzes for “Fully understand the immediate and emerging economic environment and be in a better position to assess threats and maximize opportunities”, Church added.

Banks across the United States have been pushing for the CECL’s accounting rules to be delayed in early 2020 as the pandemic took hold. However, the KBRA rating agency argued that this would not impact losses from defaulted loans.

When the first group of banks adopted the CECL in early 2020, data from the Federal Reserve showed reserves for the entire sector were unaffected or had declined slightly, according to KBRA.

In December of last year, banks were cutting reserves they had set aside to mitigate 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 long-term economic impacts of the pandemic, particularly on the outlook for their loan portfolios.

Other areas under study include the labor market, wages and prices, household finances, and residential and commercial real estate prices.

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