New risks, new rules: Post-implementation CECL compliance, hedging strategies, and policy shifts

Following our recent Financial Services Group webinar, this article continues the conversation by exploring CECL compliance, hedging strategies, and regulatory developments.

Amid economic volatility and changing regulatory expectations, financial institutions that are quick to adapt will be better positioned to capitalize on emerging opportunities. The post-implementation phase of CECL is ushering in a new era marked by heightened expectations for accountability, model risk management, assumption governance, and sensitivity analysis. At the same time, institutions are rethinking hedging strategies to manage balance sheet exposure and earnings volatility, while staying alert to policy reversals and emerging guidance from regulators.

In the sections that follow, we examine how banks and credit unions can strengthen their compliance posture, refine their risk models, and modernize their financial strategies to stay ready for what lies ahead.

CECL, Model Risk, and What’s Changing Post-Implementation

Now a few years into CECL implementation, regulators are signaling that the initial “grace period” is over. Financial institutions are expected to demonstrate greater maturity in how their models reflect current economic realities, including GDP fluctuations, unemployment rates, and credit-specific risks. This has placed a renewed focus on model risk management and the use of sensitivity analysis to evaluate assumptions.

Model Validation and Sensitivity Analysis

Institutions are expected to:

• Conduct regular backtesting to assess model performance and input sensitivity.
• Use sensitivity analysis to identify key risk drivers and concentration points. Stressing assumptions like curtailment, prepayment, and funding rates helps management understand their impact on reserves. Running different model iterations (baseline, adverse, severely adverse) enables comparison.
• Perform annual validations (or biennial for smaller banks), particularly for those subject to Supervisory Letter SR 11-7: Guidance on Model Risk Management. Regardless of scope, documentation and independence remain non-negotiable. Institutions should consult their external auditors on validation expectations.

Governance and Assumption Management

Effective model governance now requires institutions to:

• Demonstrate how assumptions translate to risk.
• Defend assumptions across stress testing and segmentation updates (e.g., downtown vs. suburban CRE).

Hot tip: This might be a good time to revisit your segmentation strategy and consider sub-segmentation where material differences exist (e.g., CRE retail vs. CRE office). Don’t forget to document why your assumptions are still valid or how they’ve changed.

Qualitative Factors (Q Factors)

Q factors must be grounded in data, not based on judgment alone. Risks like tariffs or economic uncertainty now demand more than a one-line explanation. Anchoring and scaling provide the structure and consistency needed to support and defend these adjustments.

Purchase Accounting

The end is near for “double counting” credit losses in purchase accounting. Updates to Purchased Financial Assets (PFAs) aim to

• Improve comparability across acquirers.
• Eliminate confusion around PCD vs. non-PCD treatment.

Hedging Strategies in a Volatile Market

With uncertainty surrounding interest rates, inflation, and economic growth, institutions are leveraging tools like interest rate swaps, options, and futures to reduce earnings volatility and manage balance sheet exposure, but many still hesitate due to perceived complexity.

Key strategies include:

• Fair Value Hedges: Offer real-time P&L recognition and reduce volatility but come with heavy documentation burdens. When done right, strong documentation can enhance risk transparency and strengthen investor confidence.
• Cash Flow Hedges: Help defer impact to earnings and manage forecasted transaction volatility, ideal for uncertain timing of flows.
• Portfolio Layer Method (ASU 2022-01): Simplifies fair value hedge accounting for portfolios with prepayment risk.
• Documentation and effectiveness testing: Clearly define the hedged item, the hedging instrument, and your assessment method to withstand audit scrutiny.

Hot tip: Many institutions only hedge on the asset side. However, strategic use of derivatives on the funding side can access new management opportunities and create a competitive advantage.

Regulatory Reversals and Policy Shifts to Watch

Recent regulatory developments reflect continued volatility spurred by the current presidential administration and signal a broader shift in financial oversight. Key updates include:

Overdraft Rule Reversal and CFPB Budget Cuts

• The repeal of the Consumer Financial Protection Bureau’s (CFPB) so-called “midnight” overdraft rule means that banks with assets exceeding $10 billion are no longer required to adhere to a federally mandated $5 cap on overdraft fees. While this move lifts contentious price control for large financial institutions, it has reignited debate over consumer protection.
• Compounding the overdraft repeal, on June 3, 2025, the U.S. House of Representatives passed a bill to reduce the CFPB’s budget by 70%. The CFPB’s payroll encompassed approximately 50% of its fiscal obligations for 2024. As a result, it would be reasonable to expect other potential rollbacks of CFPB provisions for financial institutions of all sizes.

SAB 122 Signals Easing of Crypto Oversight

• The SEC’s Staff Accounting Bulletin (SAB) 122 rescinds the prior guidance requiring crypto custodians to record a corresponding liability and asset on their balance sheets. This change aims to encourage broader institutional adoption of crypto assets by easing disclosure and fair value rules.
• These developments underscore the need for continued dialogue between regulators and financial institutions around digital asset reporting. While SAB 122 reflects a more accommodative regulatory posture, questions persist regarding the adequacy of current accounting frameworks.

HUMPS Act to Modernize CAMELS Framework

• Still in its early stages, the Halting Uncertain Methods and Practices in Supervision (HUMPS) Act of 2025 proposes a significant overhaul of the CAMELS rating system, first introduced in 1978. The legislation seeks to make supervisory evaluations more objective and criteria-based.
• A key focus of the bill is the potential reform or removal of the subjective “Management” component to reduce examiner bias and improve consistency and transparency.

Hot tip: Given the pace and unpredictability of regulatory change, institutions should carefully assess their risk appetite and operational flexibility. This includes:

• Preparing for potential reversals in CFPB compliance expectations.
• Evaluating crypto asset onboarding strategies.
• Reassessing succession planning tied to CAMELS ratings.

We Can Help

At Elliott Davis, our Financial Services Group helps institutions turn uncertainty into opportunity. We offer tailored support across key areas, including:

• CECL framework refinement and model validation
• Hedge accounting strategy support
• Interpretation of PFA updates
• Regulatory impact assessments (e.g., CFPB, SEC)
• Digital asset onboarding (accounting treatment, custody controls, disclosure readiness)
• Governance, documentation, and audit readiness

Download our PDF from the webinar, watch the full webinar replay below, or contact our team today to start the conversation.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

“Elliott Davis" is the brand name under which Elliott Davis, LLC or PLLC and Elliott Davis Advisory, LLC and its subsidiary entities provide professional services. Elliott Davis, LLC or PLLC and Elliott Davis Advisory, LLC (and its subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Elliott Davis, LLC or PLLC is a licensed independent CPA firm that provides attest services to its customers. Elliott Davis Advisory, LLC and its subsidiary entities provide tax and business consulting services to their customers. Elliott Davis Advisory, LLC and its subsidiary entities are not licensed CPA firms. The entities falling under the Elliott Davis brand are each individual firms that are separate legal and independently owned entities and are not responsible or liable for the services and/or products provided by any other entity providing services and/or products under the Elliott Davis brand. Our use of the terms “our firm” and “we” and “us” and terms of similar import, denote the alternative practice structure conducted by Elliott Davis, LLC or PLLC and Elliott Davis Advisory, LLC.