March 11th, 2018

Question 1: What is CECL?

The Current Expected Credit Loss model (CECL) is the new accounting model FASB has issued for the recognition and measurement of credit losses for loans and debt securities. The new standard will generally be effective for SEC registrants’ 2020 financial statements and in 2021 for banks that are not SEC registrants. For banks that are not considered Public Business Entities (PBEs), the effective date will be at December 31, 2021, alleviating them of the requirement to file CECL-based call reports until then (please note that “public” is according to the FASB’s definition, which is not the same as other commonly-used definitions – see question 11 for more information).
Early adoption is permitted beginning in 2019. Accounting for loan losses is at the heart of bank accounting, as it affects what banks do – lend money and collect principal and interest. Amounts that banks do not expect to collect will be recorded in the allowance for loan and lease losses (ALLL) and in an allowance for credit losses on Held-To-Maturity (HTM) debt securities. Any additions to the ALLL are recorded as expenses, which reduces bank capital.

Question 2: What’s at stake with the accounting change?

FASB is replacing the current “incurred loss” accounting model with an “expected loss” model – CECL. Banking regulators have referred to CECL as “the biggest change ever to bank accounting.” This standard is expected to have a huge impact on the costs to prepare and audit the ALLL, how investors analyze the ALLL, and how banks manage their capital. While initial estimates in 2011 indicated 30-50% increases in the ALLL would result from CECL implementation, independent estimates since then have been significantly lower, as the CECL estimate is largely dependent on a company’s forecast of future economic conditions. For that matter, certain aspects of CECL may actually lower allowances in some portfolios. Therefore, while it assumed that ALLL balances will generally increase, the extent of the change is unknown at this point and due to a changing economy, estimates could change often between now and the 2020 implementation date. CECL requires significant changes to the data a bank maintains and analyzes. Bankers, regulators, and auditors are in agreement that more granular data and analysis will be required and new performance metrics will be needed.

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