Too many cooks in the kitchen: mastering the art of managing CECL volatility

Cristian deRitis and Christopher Stanley

“Once you have mastered a technique, you hardly need to look at a recipe again and can take off on your own” Julia Child

Regardless of their CECL adoption status, all reserve managers can expect questions about volatility. In the pre-adoption phase of CECL preparation, volatility discussions commonly emphasised the correct root causes, but too often compelled reserve managers with a formulaic approach. Great chefs master fundamentals, not recipes. To remix their CECL menu, or improvise when confronted with volatility, filers will need to think more like a chef than a home cook. Economic forecasting and credit modelling fundamentals provide a discussion guide for model developers, credit risk and financial planning professionals to agree on objectives and adapt when the unexpected forces a change of recipe.

This chapter is organised using the primary drivers of volatility, and includes prompts for thoughtful consideration of fundamentals — not formulas — by CECL stakeholders. We explore the causes, consequences and processes that filers may adopt to measure and mitigate volatility while still achieving the standard’s requirement of producing a “reasonable and supportable”