Kingsley Greenland, President & CEO
The Financial Accounting Standards Board (FASB) is ushering in a new era of banking by changing the traditional method in which credit losses are calculated. The new standard, known as Current Expected Credit Loss (CECL), represents the largest accounting change in banking history. Meeting the new standard will be a major challenge for banks that could affect nearly every aspect of their operations. At a minimum, CECL will prompt banks to reexamine their lending practices. It may also require some banks to set aside additional loan loss reserves, a potential impact that could lower bank earnings when CECL takes effect. The first group of institutions subject to the new standard—publicly traded banks— must begin running parallel reserve calculations starting this January.
Boston-based DebtX, one of the nation’s leading fintech firms, has been working with financial institutions to help them meet the requirements of the new standard. DebtX President and CEO, Kingsley Greenland said his firm has developed a solution for the special challenges facing small- to mid-tier financial institutions. Banks of this size typically lack the in-house staff and expertise to build and maintain a CECL solution. Greenland said DebtX’s solution, DXCDA, addresses all of CECL’s requirements efficiently and cost-effectively DXCDA quickly calculates expected loss for a portfolio under a six different scenarios. It provides loan-by-loan calculations and creates an audit trail that can be used by accounting professionals to evaluate the quality and integrity of a bank’s model.
DXCDA builds on DebtX’s unique experience selling loans for financial institutions around the world and providing analytical tools to assess credit and overall portfolio risk, Greenland said. DebtX is the world’s largest marketplace for whole loans bought and sold by banks, insurance companies, investment banks, hedge funds and opportunity funds. Founded in 2000, DebtX has sold hundreds of thousands of loans totaling more than $40 billion.
Those transactions constitute the world’s most comprehensive set of trade and loan loss data and are only available in DXCDA, not other CECL solutions. As a market-leading liquidity platform, DebtX enables financial institutions to engage in active portfolio management. Complementing its marketplace, DebtX offers valuation, risk and credit scoring solutions, including DXCDA. Together, Greenland said these solutions help institutions better manage their loan portfolios, reduce risk, and improve M&A decision-making.
Efficient and Cost-Effective
As an outsourced solution, DXCDA was designed by DebtX to help bankers avoid two major implementation headaches. First, DXCDA saves banks the effort of building their own model, an expensive and time-consuming process. DXCDA is a turnkey solution built by DebtX’s highly experienced team of analytics and technology professionals. Second, DXCDA assumes responsibility for regularly updating loan loss, market and economic data that inform the model. A cloud-based solution, DebtX can seamlessly update the information as needed.
To make the most of a CECL implementation, DebtX recommends that banks take an opportunistic, long-term approach. In particular, Greenland urges bankers to implement a model that delivers insights at the loan-level rather than the portfolio-level. At the loan level, expected loss data can help determine whether a specific loan should be held, monitored or sold, depending on its impact to reserves. In contrast, portfolio-level modeling does not offer additional insight or opportunity to take specific action. DebtX also suggests that any CECL implementation benefits other aspects of a bank’s loan portfolio management and credit monitoring. DXCDA, for example, provides stress testing, fair value, credit risk scoring, and business intelligence tools, Greenland said.
With the CECL deadline approaching, it is important for bankers to implement a workable CECL solution. DebtX has developed an innovative solution that can help bankers save time and money and materially improve the management of their balance sheet.