The CECL Handbook: A Practitioner’s Guide
First published:
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Challenges and solutions for securities portfolios
Dima Babykin
Introduction
An overview of CECL: setting the context
Outlining the most impactful assumptions and challenges under CECL: an auditor’s view
Outlining the most impactful assumptions and challenges under CECL: a banker’s view
A banking industry perspective on key CECL decisions
Challenges and solutions for wholesale portfolios
Challenges and solutions for retail mortgage portfolios
Challenges and solutions for retail credit card portfolios
Challenges and solutions for student loans
Challenges and solutions for securities portfolios
The evolution of purchased loan accounting: from FAS 91 to the CECL transition
Challenges and solutions for qualitative allowance
Challenges and solutions: an auditor’s point of view
Early view of CECL integration into stress testing: practical approaches
Too many cooks in the kitchen: mastering the art of managing CECL volatility
Beyond CECL: rethinking bank transformation
Data collision: efficient lending under CECL
Cutting through the hype: how CECL is impacting investor views of procyclicality, credit analysis and M&A
Concentration risk: the CECL magnifying glass
Closing thoughts
Debt securities are financial assets that entitle the holder to receive interest payments and principal at maturity. This type of tradable asset is widely known, and this chapter will provide an overview of the typical challenges that institutions can encounter when implementing CECL guidelines for debt security portfolios, and a number of common solutions and recommendations will also be presented. First, there will be an overview of securities, including their accounting treatment under CECL, followed by a look at several of the most common challenges, which is subdivided into data, modelling and special types of security.
SECURITIES IN THE CECL FRAMEWORK
Securities overview
Generally accepted accounting principles (GAAP) defines a debt security as any security representing a creditor relationship with an entity. Debt securities are typically tradable financial assets that give the holder the right to receive interest payments and principal at maturity. At the origination of a security, the lender provides the principal amount to the borrower and in exchange receives a guaranteed interest and principal payments before maturity. Common security agreements include terms
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