Deregulation
Banks, particularly those below $250B in total assets, have sought relief from the more onerous portions of the Dodd-Frank Act for some time. The proposed House and Senate bills granting relief in certain areas and under certain conditions has a good chance of passage under the Trump administration and will likely be voted on in the coming session.
The effects and benefits of the proposed reliefs are yet to be determined. Just as these bills were being introduced, the Federal Reserve began its new Horizontal Capital Review (HCR) which replaces the qualitative assessment of their capital plans in The Comprehensive Capital Analysis and Review (CCAR) for large and noncomplex (LNC) designated firms.
Although the HCR has a narrower and targeted review of specific areas of capital planning, many of the LNC firms are facing substantial investments in training, governance and documentation to meet expectations. In addition, firms are in full due diligence mode in preparing for the new CECL standard from the FASB. Assuming there is some relaxation in CCAR requirements, the new CECL standard will pick up where they left off and come at a “speed of business” pace rather than a bi-annual exercise.
Brexit
North American based firms are also anticipating and examining the expected impacts to their businesses from Brexit and are likely to see additional regulatory requirements when all is said and done.
Firms with UK based operations supporting significant business in the EU are also looking at relocation expenses and other increases in day to day business costs resulting from the separation.
Finance, Risk and Reporting Integration
A key theme will be how Finance, Risk and Reporting will become truly integrated as the start date for the new CECL standard approaches. Revising recognition of credit losses to include expected credit losses over the life of the loan will achieve the integration that regulators have long sought and hoped CCAR and stress testing would achieve.
The CECL standard will win the day for integration because it will be business as usual and disclosed through the income statement versus a once or twice a year exercise submitted to prudential regulators and receiving limited public disclosures. While there are forces gathering in opposition to the standard, the preparation firms are undergoing now will likely remain in place and for very good reason – a truly integrated FRR process provides the best foundation to the bank’s management information system.
In fact, CECL will be the primary focus of attention for banks in 2018 – particularly as to ascertaining whether financial IT systems are up to the task of handling the necessary changes. There has been significant time spent to date on learning what compliance with the new standard means, and the data gap analyses and enhancements to existing loss forecasting methods and models required to achieve compliance in 2017.
Arguably 2018 will, for many, be a year of determining how to organize or reorganize finance, risk, reporting and IT people and processes to create the efficient, transparent and repeatable systems and procedures for calculating expected credit losses. Only those firms prepared to invest in the necessary technology infrastructure to aid them in their efforts will have any competitive advantage.