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Five Things Every Financial Services Professional Needs To Know For 2018

By newadmin / Published on Tuesday, 30 Jan 2018 15:43 PM / No Comments / 5 views


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While regulation was the overarching theme in financial services (FS) over the last few years, there are now other topics taking center stage. I’ve focused here on an overview of five areas that every FS professional should know something about to succeed in the new year. I will explore these in more detail in subsequent articles, but first, here is 20,000-foot executive summary of what matters most:

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1. Current Expected Credit Loss (CECL):&nbsp;A new accounting method for potential loan losses

The What: Banks have always needed to hold reserves against potential credit losses. Today, those reserves are based on estimates of incurred losses.&nbsp;With CECL, in addition to incurred losses, reserves will also need to be taken based on expected but not yet incurred losses over the life of the loan. Financial Institutions will need to revise their loan loss procedures as well as their projected loss models to account for the changes required by CECL.

The So-What: A substantial change requiring a large effort to implement and impacting earnings:

• Change Management Challenge:&nbsp;Large change program is required to define new allowance process and governance, data, determine modeling approach and tools, etc.

• Capital Hit:&nbsp;Since potential losses are being recognized earlier, the amount of reserves will increase which will require additional capital and serve to lower the retained earnings component of equity

2. LIBOR Replacement: A&nbsp;new benchmark being defined for short-term interest rates

The What: LIBOR, the published rate that has served as a benchmark for short-term interest rates since the 1980s, will be going away. Recent scandals&nbsp;involving the manipulation of LIBOR as well as the lack of sufficient, observable data to set the rate has led the organizations that oversee LIBOR to look for an alternative.

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While regulation was the overarching theme in financial services (FS) over the last few years, there are now other topics taking center stage. I’ve focused here on an overview of five areas that every FS professional should know something about to succeed in the new year. I will explore these in more detail in subsequent articles, but first, here is 20,000-foot executive summary of what matters most:

Shutterstock

1. Current Expected Credit Loss (CECL): A new accounting method for potential loan losses

The What: Banks have always needed to hold reserves against potential credit losses. Today, those reserves are based on estimates of incurred losses. With CECL, in addition to incurred losses, reserves will also need to be taken based on expected but not yet incurred losses over the life of the loan. Financial Institutions will need to revise their loan loss procedures as well as their projected loss models to account for the changes required by CECL.

The So-What: A substantial change requiring a large effort to implement and impacting earnings:

• Change Management Challenge: Large change program is required to define new allowance process and governance, data, determine modeling approach and tools, etc.

• Capital Hit: Since potential losses are being recognized earlier, the amount of reserves will increase which will require additional capital and serve to lower the retained earnings component of equity

2. LIBOR Replacement: A new benchmark being defined for short-term interest rates

The What: LIBOR, the published rate that has served as a benchmark for short-term interest rates since the 1980s, will be going away. Recent scandals involving the manipulation of LIBOR as well as the lack of sufficient, observable data to set the rate has led the organizations that oversee LIBOR to look for an alternative.

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