For credit unions, there are multiple challenges.

The CECL Data Management Challenge

CECL comprises many elements within the institution. The final CECL calculations are a function of models that reflect the historical, current and future predictions of the current loan portfolio. These in turn are powered by the existing loan portfolio data, and also the historical economic data, covering economic growth, inflation and unemployment, for example, as well as historical loan default rates and loss given default rates.

This presents an enormous data management challenge for any institution. The models need to capture the complexity of a credit union's business models and the economy it operates in. They need to use the right data from the right sources, whether it is loan information, economic data or default rates. This data needs to be defined, and all elements – models, loan data or economic data – need to be in sync to deliver accurate and timely results, cost effectively.

The whole CECL process will need to be fully auditable, so that the owners of the business, its auditors and its regulators can have confidence that the CECL process, calculations, source data and models are all a fair reflection of the business reality of a credit union.

The Spreadsheet Management Challenge

Given the current timescales and challenges of building data inventories and developing the new CECL models – coupled with the difficulties of making changes to complex enterprise systems – suggests that credit unions will likely use spreadsheet-based models, for most, if not all their CECL needs. The renowned power and flexibility of the spreadsheet, together with their ease of use and familiarity, means they are likely to be the go-to tool of choice for many credit union CECL project teams.

However, the risk involved in using spreadsheets needs to be understood. For example, the data used to comprise the economic data and loan data will likely reside in databases – internal or external – that need to be integrated into the CECL spreadsheet environment. There may be an absence of a robust data integration capability to manage the export, transform and load (ETL) processes, and to flag errors if there is a failure – potentially stale data being used in CECL calculations, for example.

Equally, the models needed to create the historical, current and future scenarios will be very complex, featuring complicated formulas and data lineage, with more opportunity for errors to emerge without being flagged.

The Audit Management Challenge

Auditors are important stakeholders in the CECL process. They will review the CECL results, as well as the assumptions, models and data to ensure they are accurate and reasonable. They will seek evidence of the data and model governance and controls to ensure full transparency. Given the complexity of calculating CECL, demonstrating governance and control to external stakeholders in a timely and cost-effective fashion will be challenging too.

The Merits of Technology-Led Spreadsheet Management

For these reasons, credit unions will do well to consider the adoption of spreadsheet management to identify, control, monitor and govern the relevant CECL spreadsheets and models. This technology-led, best practice approach will significantly minimize the risks of using spreadsheets, thereby allowing credit unions to fully harness the power, flexibility, and familiarity of spreadsheets to meet the CECL deadline, while also ensuring they meet the governance and audit standards required. Additionally, it will help reduce the implementation risks and timescales of their CECL project.

All this can be achieved via a thorough and rigorous three-step process. First, with the help of technology, CECL project teams at credit unions can devise a sophisticated spreadsheet search model that overcomes the challenges of multiple formats, naming conventions and definitions. For instance, the search model should be able to search by file name, time or date of creation, username or user role right down to cell level in order to identify CECL-specific formulae and macros. This will ensure that all the CECL-relevant historical and current data is exhaustively captured. Crucially, the project team will be able to understand the data lineage and interdependencies of the files across the spreadsheet environment. Needless to say, this kind of data linkage analysis and real-time change management is near impossible to conduct manually.

With an understanding of the spreadsheet environment for CECL calculation, project teams must then categorize the spreadsheets based on the level of risk the respective files pose to the accuracy of the CECL calculation. This will allow them to focus their core efforts on ensuring that the most critical spreadsheets are proactively monitored. This kind of framework will also be able to offer an attestation capability for the benefit of auditors.

Finally, CECL teams must establish automated change management processes for the most critical spreadsheets. This will provide continuous monitoring capability to ensure transparency around the changes being made to each of the spreadsheet models. It is vital to ensuring that no errors or omissions occur that, if undetected, would compromise the CECL data, models and final results.

A technology-led, automated approach to spreadsheet management will deliver robust model governance, which will be fundamental to accurate CECL results. It will play an instrumental role in ensuring the effectiveness of controls to safeguard data accuracy and ensure the integrity of the data sources that feed the CECL model.

Jeremy Condie

Jeremy Condie is Vice President of Americas for ClusterSeven. He can be reached at [email protected].