Boy Scouts, Mike Tyson & CECL

Be Prepared

The Boy Scout’s motto is: “Be prepared.”

And, Mike Tyson was giving similar advice when he quipped that “[e]veryone has a plan until they get punched in the mouth.”

Looking out on the horizon, we hope that credit unions don’t get caught flat-footed when CECL hits.

  • Do you know how your balance sheet will be impacted?

  • Does your credit union have a strategy?

We are hearing from mortgage lenders that the auto guys are going to be hit the hardest. Heavy auto lenders point to personal and commercial lenders as the most likely to suffer. The truth is, nobody knows who will be impacted the most. But, everyone knows they will be impacted.

We recently stumbled upon an article authored by Beth Carr, CEO at Santa Cruz Community Credit Union.

Beth’s piece focused on business model changes and shifting lending practices to accommodate CECL implementation.

Step 1 is diagnosing the problem and understanding the implications of CECL for your credit union’s particular loan portfolio. Step 2 is identifying a solution. Step 3 is implementation and execution of that plan.

For a subset of credit unions, we continue to believe that secondary capital can be a big part of an appropriate strategy. Secondary capital can offer insulation to make additional provision allocations at the time of loan funding. At the same time, secondary capital can provide a buffer against future potential losses.

To be clear, secondary capital is not for every credit union. And, a capital infusion must be part of a long-term strategy.

We expect to be writing more about secondary capital as a CECL strategy in the coming weeks. In the meantime, please reach out if you have questions or an interest in exploring.


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