Guest post by Matthew Ashworth, cofounder and managing director of Hyperion Risk Management
The implementation of current expected credit losses (CECL) has forced banks — especially community and mid-sized institutions — to rethink how they assess credit risk, forecast losses, and defend those estimates to regulators and auditors.
Unlike the old allowance for loan losses (ALL) approach, CECL asks bankers to take a forward-looking view and predict: “The day you make a loan, how much do you think you might lose on it over its lifetime?” That’s a big shift. It requires both a strong quantitative framework and a well-supported qualitative narrative, which is where Vertical IQ can make a meaningful difference.
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Why CECL is a team effort
CECL often sits at the intersection of two executive offices’ responsibilities: the chief financial officer (CFO) and the chief credit officer (CCO). The CFO must ensure the accounting rules are followed, while the CCO provides input into the credit risk and loss expectation.
For the CECL process to work, those two worlds have to meet in the middle, and close coordination across the functional responsibilities of each executive is necessary. The CFO can’t model what the CCO can’t defend, and the CCO can’t defend what isn’t supported by data. This symbiotic relationship necessitates that both roles have access to timely, credible Industry Intelligence.
How CECL works … and where it can break down
The CECL model generally rests on three pillars:
- Historical loss experience, based on the bank’s own data or peer institution data
- Forward-looking economic forecasts, often supplied by third parties such as Moody’s or S&P
- Qualitative (Q) factors, which allow management to apply their expertise and judgment and adjust for risks not captured in the math
In my experience as both a former bank examiner and a 25-year commercial banker, the Q factors are often where the success or failure of CECL rests.
Most banks can handle the historical data pillar. Many can license a third-party baseline economic forecast as well. But when it comes to applying those factors to the bank’s current loan portfolio and articulating why certain industries, geographies, or borrower segments carry additional risk, or why they may perform better than modeled, banks often struggle to support those conclusions with hard evidence.
Using Vertical IQ to strengthen Q factors
This is where Vertical IQ’s timely, accurate economic and Industry Intelligence proves especially valuable. Banks can use it to ground their Q factor adjustments in real-world, third-party data. For example:
- A mid-size bank concentrated in limited-service hotels might use the Vertical IQ Industry Profile’s Industry Forecast to document declining occupancy rates or flat ADR trends — clear justification for a higher expected loss.
- A community bank expanding its exposure to medical practices can leverage Vertical IQ’s industry data to show stable demand, predictable reimbursement flows, and moderate growth expectations, potentially supporting a more favorable Q factor adjustment.
- When regulators or auditors ask, “Why did you adjust this way?”, bank leaders can point to Vertical IQ as a credible, independent source, rather than relying on internal judgment alone. That transparency builds confidence and defensibility.
Going beyond national averages
Many CECL models rely on national-level economic data, but most small, mid-size, or community banks don’t lend nationally. Therefore, their risks are generally regional and industry-specific. For instance, a bank focused on Birmingham or Tulsa doesn’t care about national GDP; they care about what’s happening in their local economy.
Vertical IQ’s data bridges this gap. Through partnerships with experts like Local Market Monitor, INFORM (Inter-Industry Forecasting Model at the University of Maryland), and other economic sources, Vertical IQ provides regionalized economic data and industry-specific forecasts. In fact, it provides data on 100% of the U.S. economy and more than 300 metropolitan statistical areas (MSAs), plus more than 3,100 counties across the U.S.
That local-level intelligence makes for a more relevant and reliable CECL input, particularly when justifying assumptions around regional credit conditions.
Enhancing concentration management
For banks with industry concentrations, CECL becomes even more critical. Regulators expect bank leadership to demonstrate a strong understanding of the sectors where bank capital is at risk.
Vertical IQ makes that analysis much easier. Its Industry Briefs provide the key facts —growth trends, cost pressures, competitive forces, and external dependencies — that help both bank management and the board make informed decisions about concentration risk.
When lending staff propose to increase exposure in a given sector, being able to hand the board a succinct, data-backed industry analysis is far more compelling and reassuring than saying, “Trust me; we know this business.”
A smarter way forward
At Hyperion Risk Management, we work with banks across the country that are still wrestling with how to make CECL practical, defendable, and useful. What I see consistently is that banks don’t need another model; they need more reliable data and better context.
Vertical IQ offers both. It doesn’t replace your bank’s CECL framework; it strengthens it. Economic and Industry Intelligence from Vertical IQ helps CFOs and CCOs align on a common set of facts, improves the rationale behind qualitative adjustments, and ultimately builds confidence with boards, auditors, and regulators.
By embedding Vertical IQ’s Industry Intelligence into your CECL process, you can:
- Justify Q factors with current, defendable data
- Strengthen regulatory and audit responses
- Save time gathering external data from multiple sources
- Transform CECL from a compliance burden into a strategic risk management tool
Indeed, the smartest banks (and bankers!) are learning to turn compliance into savvy insight. CECL, done well, isn’t just about loss recognition, after all. It’s about understanding your bank’s credit risk in a deeper, more forward-looking way. Vertical IQ gives your finance and credit teams the reliable intelligence they need to make CECL not just an accounting/regulatory requirement, but a competitive advantage.
Matt Ashworth (right), cofounder and managing director of Hyperion Risk Management, is a former commercial banker and bank examiner at the Office of the Comptroller of the Currency (OCC) with over 25 years of experience in commercial banking and credit risk management. He earned a finance degree from the University of Georgia and is a graduate of the Pacific Coast Banking School at the University of Washington.
Hyperion Risk Management is an independent regulatory advisory firm that partners with companies of all sizes and complexity in the financial services industry. Their services include regulatory remediation, strategic collaboration, independent credit review, risk management system development, and more.
Main image: Pexels, Jakub Zerdzicki; headshot image: Matthew Ashworth