Slide 1: Debt Securities and Other Assets Considerations Under CECL
Debt Securities and Other Assets Considerations Under CECL September 2019
Slide 2: Speakers
Speakers Masha Muzyka Scott Dietz Senior Director, Risk and Director, Risk and Accounting Solutions Accounting Solutions Moody’s Analytics Moody’s Analytics Debt Securities and Other Assets Considerations Under CECL 2
Slide 3: Today's Discussion Points
Today’s Discussion Points » Changes to debt securities accounting as a result of ASC 326 » PCD accounting » Transition Guidance, Disclosures and Reporting » Modeling considerations – securities and other insurance assets in scope » Q&A Debt Securities and Other Assets Considerations Under CECL 3
Slide 4: Different Exposure Profiles
CECL Focus Different Exposure Profiles Banks Insurance Corporates Investments securities Small business Retail loans •Bonds •Structured loans •munis C&I – CRE loans C&I loans C&I loans Securities •Munis Short dated •Bonds CRE exposures Debt Securities and Other Assets Considerations Under CECL 4
Slide 5: Example Segmentation
Example Segmentation Reinsurance Corporate Bonds Private Loans CRE Mortgage & Other Loans Government Bonds Bonds - Structured Securities Receivables Central ABS – Equipment Common Bonds Agriculture Apartment Residential On Claims ABS – CBO/CLO Government Bonds lease Subordinated Private placements O
Slide 6: Overall Changes to Security Accounting
Overall Changes to Security Accounting » Treatment of AFS and HTM classified securities will be distinctly different » HTM will follow the CECL model » AFS securities have their own path » In both instances, replaces the current other-than-temporary-impairment (“OTTI”) logic CECL HTM OTTI Methodolog
Slide 7: HTM Debt Securities
HTM Debt Securities Future GAAP vs Current GAAP OTTI Model CECL Model » Impairment is measured and recorded » Measure ECL upon initial recognition only when FV is less than Amortized Cost (AM Cost) » Perform assessment on a collective pool basis when similar characteristics exist » Perform assessmen
Slide 8: AFS Credit Loss Model Decision Tree
AFS Credit Loss Model Decision Tree Do you intend to sell If decline is due to Is FV < Am No the security Yes credit losses – Cost? or will likely recognize ACL be required through provision, to sell? subject to FV floor. Non-credit related Yes No change – record through OCI Write off the allowance
Slide 9: AFS Securities will be treated differently
AFS Securities will be treated differently Future GAAP differences between HTM, HFI and AFS New AFS Credit Loss Model CECL Model » ECL are measured and recorded through » Measure ECL upon initial recognition (HFI allowance only when FV is less then AM loans and HTM securities) Cost » Perform assessm
Slide 10: What is PCD?
What is PCD? » PCD Purchase Credit Deteriorated (PCD) assets » At acquisition experienced a more-than-insignificant deterioration in credit quality since origination » Replaces the former Purchase Credit Impaired (PCI) accounting which required evidence of deterioration » Applies to all assets wit
Slide 11: Transition Guidance for HTM and AFS
Transition Guidance for HTM and AFS Transition prospectively (no change to AmCost) The EIR is retained and locked in AFS and HTM Debt Securities Amounts previously recognized in OCI – continue to accrete OTTI previously recognized to income over the life using EIR Recoveries of the previous charge o
Slide 12: New Disclosure Requirements…Qualitative Disclosures
New Disclosure Requirements…Qualitative Disclosures 326-20-50-11 An entity shall disclose all of the following by portfolio segment and major security type: a) A description of how expected loss estimates are developed b) A description of the entity’s accounting policies and methodology to estimate
Slide 13: New Disclosure Requirements…Roll Forwards!
New Disclosure Requirements…Roll Forwards! Debt Securities and Other Assets Considerations Under CECL 13
Slide 14: CECL Modelling Approaches…which one is right?
CECL Modelling Approaches…which one is right? (Less) MC State Transition DCF Non-DCF PD/LGD Rating Implied Granularity Survival Vintage Competing Hazards Analysis Scenario Roll Rates Enabled Industry Benchmark Migration Proxy Data Historical CO Scenario Closed Pools (More) Enabled Open Pools 3rd dim
Slide 15: Methodologies and Example of Moody's models offered
Adopt Methodologies and Example of Moody’s models and methodologies offered Adapt Historical Commercial - Commercial – Retail Securities Receivables Custom Loss Analyzer CRE C&I Historical Call Report Call Report Call Report Reinsurance Cashflows SAS Analysis Forecast Forecast Forecast receivables C
Slide 16: Overview of ECL Calculation Engines
Overview of ECL Calculation Engines Three Methodologies for ECL Calculations Loss Rate PD/LGD Cash Flow • Annualized • Annualized • DCF - Expected Cash Flow • Lifetime • Lifetime • DCF Loss Cash Flow • Curve • Loss Cash Flow Debt Securities and Other Assets Considerations Under CECL 16
Slide 17: PD x LGD x EAD = EL
PD/LGD Method Probability of Default Exposure at Default What is the probability of a What is the outstanding borrower defaulting over loan balance at the contractual life of the default? loan? PD x LGD x EAD = EL Loss Given Default Expected Loss When the loan defaults, what The CECL allowance is th
Slide 18: CECL – Commercial Loan Models and Data
CECL – Commercial Loan Models and Data Model Development Model Development Data Source Data Secure cloud based data exchange Commercial CSV file upload Loan Level Segment Data and Origination Level Scenario Upload (calibration available) (calibration available) Benchmarks Data Alliance Automated dat
Slide 19: Commercial Mortgage Metrics ("CMM")
Commercial Mortgage Metrics (“CMM”) » CMM is the leading analytical model and risk management tool for assessing credit risk in commercial real estate loans. » CMM offers: » PD and LGD (PIT and TTC) metrics built on extensive, proprietary dataset and calibrated to recent financial crisis » Robust sc
Slide 20: CECL – Securities Model Development and Data
CECL – Securities Model Development and Data Model Development Model Development Data Source Data Consumer ABS Secure cloud based data Structured Credit Autos Student Loan exchange Loan Lease Floor Plan Private FELP Market Cash Synthetic Value CMBS Credit Card CSV file upload Bank Retail Credit Mode
Slide 21: Modeling Process
Modeling Process Quantitative Approach » Complexity of underlying collateral and deal structure » Model-driven collateral forecasting » Analyst assumptions/overrides Analyst Analyst Override Override Portfolio Behavior Model Cashflow Engine Tranche Results RMBS Residential Waterfall Structure Loss C
Slide 22: Credit Modeling Overview
Credit Modeling Overview For each asset type, forecast default, prepayment, and severity for each loan or pool in the transaction. FACTORS MODELS OUTPUT Economic Data » Default Loan and/or Pool Data » Residential (RMBS) – FICO, Pool Level E(L) Loan Level E(L) LTV, Zip Code, Rate, Term/Age » Commerci
Slide 23: Stress Potential Muni Credit Losses
Stress Potential Muni Credit Losses Muni Loss Forecasts: Scenario Conditioned PD and LR Forecasts » Allows users to stress individual muni issuers, or entire portfolios for CECL and other stress testing applications » Historical data spanning 5 decades and over 32,000 muni issuers » 2 step forecasti
Slide 24: Muni Loss Forecast Models
Muni Loss Forecast Models Scenario-Conditioned and Issuer Specific 0.14 University of Pittsburgh, yr ahead % PD 0.12 Baseline Optimistic Moderate recession 0.10 0.08 0.06 0.04 0.02 18 19 20 21 22 23 24 25 26 27 Source: Moody’s Analytics Debt Securities and Other Assets Considerations Under CECL 24
Slide 25: Starting PD: TTC to PIT PD Converter
Starting PD: TTC to PIT PD Converter Using Moody’s internal models and data to produce a dynamic PD to rating map. (1) Credit cycle estimation Point-in-time PD term structure is adjusted to reflect the current credit cycle. (2) Forward looking adjustments Additionally, for the calculation of lifetim
Slide 26: Scenario Conditioning: GCORR Macro Model
Scenario Conditioning: GCORR Macro Model » Industry Leading Model: Moody’s correlation framework is the industry standard to estimate clustered defaults and ratings downgrades in poor macro-economic conditions. » Model ready to use “off the shelf”: General segment, industry and country (including se
Slide 27: Questions & Answers
Questions & Answers
Slide 28: moodysanalytics.com
Scott Dietz Masha Muzyka Director – Risk, Accounting, & Finance Solutions Senior Director – Risk, Accounting, & Finance Solutions scott.dietz@moodys.com masha.muzyka@moodys.com Ph: (347) 225-6384 Ph: (212) 553-7215 moodysanalytics.com
Slide 29: Moody's Analytics CECL Forum for Community Banks & Credit Unions
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