FASB's CECL Model
The Financial Accounting Standards Board (FASB) issued the final current expected credit loss (CECL) standard on June 16, 2016. After the financial crisis in 2007-2008, the FASB decided to revisit how banks estimate losses in the allowance for loan and lease losses (ALLL) calculation. Currently, the impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the new CECL model.
Under the new current expected credit loss model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.
Key CECL finalization links and resources:
model risk management
3 Risks Asset/Liability Management Addresses
Banks and credit unions face a seemingly never-ending array of financial risks, as the pandemic showed. From health-related surprises to natural disasters to terrorist attacks, the unexpected circumstances that can affect the balance sheets of financial institutions highlight the importance of capital planning and asset/liability management (ALM). Indeed, having sufficient capital to handle the unexpected... Read more »
model risk management
Managing Financial Risk in a Post-Pandemic Environment
The piano can capture a variety of moods, depending on the musician at its seat. But even simple melodies from a finely tuned piano can tell a story. And when a few instruments combine, following the same sheet music – the correct key and time signature – the story’s effect is even stronger. The same... Read more »
Relating Fair Value and CECL: Misconceptions, Challenges, and Solutions
In just a matter of months, the coronavirus pandemic has had an unprecedented impact on the economy, upending financial institutions’ 2020 goals and business strategies. Now, banks and credit unions across the country must be nimble, making the necessary adjustments to meet the needs of the institution and its customers and members amid the pandemic.... Read more »
CECL vs. Incurred Loss: How the Pandemic Affected the Allowance
In 2020, most SEC-filing institutions were required to move to the new current expected credit loss, or CECL, model. Following the 2007-2008 financial crisis, the CECL model aimed to provide more timely adjustments of reserve levels than the existing incurred loss method. Unlike the incurred loss model, the CECL model is forward-looking, estimating loans’ lifetime... Read more »
CECL Updates for Directors: 3 Topics to Cover with The Board
CECL updates for directors are critical for financial institutions transitioning to the current expected credit loss (CECL) standard in 2023. After all, the board (or its designated committee) has oversight responsibility for the management and for activities related to the allowance for credit losses and provisions for credit losses. In addition, directors have oversight responsibilities for... Read more »
3 Things to Know About Q Factors Under CECL
‘What will happen to Q factors?’ Want to know how to develop qualitative factors, or Q factors, under CECL, the current expected credit loss standard? You’re not alone. Q factors – more specifically, “What’ll happen to my Q factors under CECL?” is a popular topic among bankers, especially those with a 2023 CECL implementation date, according... Read more »
Motivating 2023 Filers to Jump into CECL
The deadline for 2023 filers to transition to the current expected credit loss (CECL) model is rapidly approaching. Since the release of the CECL standard from the Financial Accounting Standards Board (FASB) in 2016, financial institutions have navigated changing timelines, opacity in requirements and methodologies available to them, and challenges with building defensible forecasts. Those preparing for the 2023 deadline are... Read more »
Worried About the CECL Unknowns? Here’s What You Need to Know
For years, experts have emphasized the importance of preparing early for the implementation of the current expected credit loss (CECL) standard. CECL “analysis paralysis” has plagued many financial institutions, delaying banks’ and credit unions’ ability to get started quickly. Now, nearly a year out since the effective date for SEC filing institutions, the importance of making early implementation decisions continues to be a leading indicator of CECL success. ... Read more »
Adopting CECL Accounting for 2023? 5 Myths about the Change
For financial institutions adopting the current expected credit loss, or CECL, accounting standard in 2023, the next 26 months will pass quickly. As these banks and credit unions work to identify and gather relevant loan-level data and select a methodology for calculating the allowance for credit losses, or ACL, they must also deal with coronavirus-related... Read more »
CECL Methodology Implications for 2020 and 2023 Adopters
For years, financial institutions across the country have been preparing for the implementation of the new current expected credit loss (CECL) accounting standard. A central driver of FASB’s action to CECL was criticism following the 2008 financial crisis that financial institutions had recorded losses too slowly and that past loss experience would be reflected in... Read more »
Credit Loss Modeling Services: COVID qualitative adjustments, Stress Testing, and CECL
Activities from pricing, budgeting, allowance preparation, and stress testing depend on current and forward-looking expectations for the volume and timing of credit losses. Estimating losses in an environment that differs from recent historical experience in a consistent, quantitatively justified manner requires the use of some form of modeling approach. While the application of those models and underlying assumptions vary by activity, the model should still reflect the institution’s best estimate, and should not consider any reliable inputs “off-limits” during development.
Bridging the Gap: How to Get Started with CECL with No Meaningful Losses
Data is undeniably the foundation for driving accurate current expected credit loss models. For financial institutions that must comply with CECL and lack meaningful losses or loan history, it can be overwhelming to determine where to start. While 2023 can seem distant, community financial institutions must assess and resolve data gap challenges now. “It takes... Read more »
CECL Tips for Financial Institutions Complying in 2023
With a little less than three years until private banks and credit unions must comply with the current expected credit loss (CECL) standard, making strides toward implementation may fall to the bottom of a 2020 priority list. As we move along in 2020, large SEC filers are already beginning to disclose the impact that CECL... Read more »
Large SEC Filers Begin Reporting CECL’s Impact
CECL’s impact on a financial institution is all about the portfolio makeup. That’s the main message from the first financial institutions to report officially on the effects of adopting the current expected credit loss model.
What SEC Filers Have Learned About CECL Implementation
All eyes will be on the large SEC registrants in January as they become the first financial institutions to adopt the current expected credit loss model, or CECL. Regulators, investors, and other stakeholders will be watching and listening for updates on the impacts of the accounting change.
How to Approach a Volatile Economy and Procyclicality During CECL
Amidst concern over an economic slowdown, financial professionals have questioned how a recession could affect an institution’s reserves. Hal Schroeder, a Financial Accounting Standards Board (FASB) board member, led a presentation, “Roadmap to the Future: Fact vs. Fiction (on CECL and Other FASB Standards),” at the 2019 ThinkBIG conference and addressed many CECL questions.
FASB Hosting CECL Workshops as Implementation Moves Ahead
FASB is hosting CECL workshops around the U.S. in coming months, reinforcing its commitment to the upcoming current expected credit loss standard, or CECL.
The Benefits of Connecting CECL, ALM, and Stress Testing
Managing risk is at the very core of the business of banking and a fundamental differentiator between financial institutions. In other words, institutions that identify, measure, and manage risk most effectively will outperform their peers in terms of financial performance, while also maintaining safety and soundness. This is especially true during economic downturns as institutions... Read more »
FASB ASU Extensions Now Open for Comments
The Financial Accounting Standards Board (FASB) on Thursday, August 15th has issued a proposed Accounting Standards Update (ASU) that provides at least 2 years of relief to small public banks, privately held banks, and credit unions for varying accounting standards. This update covers the standards on current expected credit losses (CECL), leases, and hedging. Also... Read more »
CECL Lessons Learned
By: Chris Emery Director, Strategy, and Engagement Abrigo At Abrigo, many of us eat, sleep and breathe CECL. Since the very inception of the concept of an expected loss standard back in 2012, Abrigo professionals have been paying close attention to the Financial Accounting Standards Board (FASB). The new accounting standard changed quite a bit... Read more »
Do This, Not That: Explaining CECL to Your Board
Explaining CECL and your institution’s transition progress to your board of directors is important. In a recent webinar, Abrigo experts outlined several suggestions for explaining the complexities of CECL to the board. Here are some of their tips.
CECL’S Impact on Your ALM Modeling
With CECL's need for financial institutions to look at a more forecasted approach to determine credit reserves, it makes sense to leverage some of the assumptions used in the past for developing loan assumptions in Asset/Liability models.
Will Financial Institutions’ CECL Data Be Sufficient?
Are financial institutions making enough progress in their CECL data collection efforts? How much data are they gathering for CECL, and will it be enough to support their calculations? Only 43 percent of institutions surveyed in the 2019 Abrigo Lender Survey expressed confidence that the data they have will be sufficient for CECL.
FASB Approves CECL Fair Value Option Change
Easing the transition to the current expected credit loss standard, or CECL, was the goal of a measure approved by the Financial Accounting Standards Board that provides entities the option to measure certain types of assets at fair value.
FASB Rejects Regional Bank Proposal, Reverses Course on Vintage Disclosures
The Financial Accounting Standards Board (FASB) made two decisions that will limit changes to the CECL standard ahead of implementation.
CECL: Survey Results Show What Institutions Are Doing Now
How prepared are financial institutions when it comes to the current expected credit loss, or CECL? Find out Tuesday during a webinar hosted by the American Bankers Association, when Abrigo will discuss the findings of its 2019 CECL Survey.
JPMorgan Chase Gives Look at CECL Impact
JPMorgan Chase’s investor presentation last week gave one of the first looks, if not the first, at how a new set of accounting rules for reporting losses on loans will impact the reserves set aside to cover them at a major U.S. bank. JPMorgan Chase CFO Marianne Lake said the financial institution expects to have... Read more »
Where Are Banking Peers in CECL Implementation? Find Out
If you’ve wondered how far along your financial institution peers are in implementing the current expected credit loss standard (CECL), now’s the time to find out. By filling out a survey sponsored by Abrigo, the leading technology provider of compliance, credit risk, and lending solutions for community financial institutions, you can learn about the banking... Read more »
The top CECL changes to ALLL disclosures
The current expected credit loss (CECL) model requires financial institutions to overhaul many aspects of their accounting for the allowance for loan and lease losses (ALLL), including disclosures. Here are five top CECL modifications expected for ALLL disclosures.
Becoming CECL compliant with an ALLL workflow system
While seeking to adapt in an ever-changing regulatory environment, bankers must adhere to heightened data requirements, new calculation procedures, and auditor/examiner scrutiny. Specifically, financial institutions have to complete numerous steps when calculating their allowance for loan and lease losses (ALLL). This can often be time-consuming, especially when multiple individuals are involved in calculating the allowance, and as the calculation extends to a life-of-loan model, the calculation will become increasingly inter-departmental.
Could CECL changes be coming?
The spotlight is shining brightly this month on potential changes to the current expected credit loss (CECL) model, even though the implementation deadline clock is ticking.
What if your CECL results aren’t what you expected?
Financial institutions across the country are now actively preparing for the ALLL transition from the incurred loss to expected loss models. By now, most banks and credit unions are well aware of the methodology options under CECL. However, many are still having challenges interpreting results from their modeling exercises.
FASB seeks comments on proposed CECL updates on accrued interest, recoveries, prepayments
Financial institutions and other parties interested in the current expected credit loss model, or CECL, have until Dec. 19 to comment on FASB's proposals to update its guidance for accounting for credit losses.
FASB meeting: New disclosure requirements related to gross write-offs and recoveries
The Financial Accounting Standards Board (FASB) met today to discuss the current expected credit loss (CECL) accounting standard and expand on implementation issues brought up in the transition resource group meeting in June. The purpose of the transition resource group is to discuss stakeholders’ issues about CECL, to inform the board of the issues, and to provide a forum for stakeholders to learn about implementation experiences of others.
CECL survey: Most bankers to use 3rd-party vendors, advisors for CECL
A majority of bankers expect their financial institutions to use third-party vendors or a combination of advisors and third-party vendors to help implement the current expected credit loss model, or CECL, according to an informal poll released by Abrigo and MST.
Large banks push for a CECL extension
The Bank Policy Institute (BPI), an organization conducting research and advocacy on behalf of America's leading banks, recently wrote a letter to the chairman of the Financial Stability Oversight Council (FSOC), Stevin Mnuchin, with a request to review the risks associated with the implementation of the new current expected credit loss (CECL) model.
What one bank views as the key decisions ahead of CECL
Financial institutions across the U.S. are grappling with the many changes that will be required as they implement the CECL standard. In fact, some are so overwhelmed that they succumb to "CECL paralysis," or a lack of action, Abrigo analysts have noted. In order to get moving, it can be helpful for financial institutions to understand how others have approached CECL implementation and what key decisions they have tackled early on in the CECL process.
Can a financial institution’s allowance be lower under CECL?
Will examiners challenge financial institutions if the current expected credit loss method (CECL) results in a lower allowance than under the incurred loss model? Banking agencies addressed this question during a recent webcast.
Discounted cash flow: Good to use for CECL?
Discounted Cash Flow (DCF) models, while not widely adopted as a means to account for the allowance for loan and lease losses (ALLL) under ASC 450-20 (current GAAP), have been accepted as best practice for adherence to other analogous accounting standard objectives.
FASB issues draft language on CECL extension
The Financial Accounting Standards Board released the draft of its proposed Accounting Standards Update to clarify the transition for non-public business entities (non PBEs) under the current expected credit loss model, or CECL.
Credit unions vs. community banks: What are the different CECL challenges?
Community banks and credit unions face different challenges when preparing for the new current expected credit loss model (CECL). Often, credit unions are grouped together with community banks, although their experience will look different when building out their models. What loss rate methodologies are applicable to community banks but not credit unions? What challenges do credit unions face that are unique to their own loss history, portfolio structure and loan count?
Preparing for CECL questions during upcoming bank exams
Bankers preparing for the Financial Accounting Standards Board’s (FASB) new current expected credit loss model, or CECL, have many questions about implementation, including what to expect in the way of CECL scrutiny during 2018 visits from banking examiners. They got a glimpse of an answer this week when federal banking agencies discussed the topic during a webinar for community bankers about the new credit loss accounting standard.
The two main hidden complexities of CECL
CECL's details have been out for two years, but banks and credit unions may encounter complexities when theory collides with the reality of implementation.
New stress testing reform may have some CECL benefits
Banks with assets between $10 billion and $250 billion will no longer be subject to mandated annual stress testing, whether it be for the Dodd-Frank Act Stress Test (DFAST) or the Comprehensive Capital Analysis and Review (CCAR), due to the passage of a new regulatory relief bill.
Discover These CECL Training Resources for Banks and Credit Unions
With implementation of the current expected credit loss model, or CECL, quickly approaching, banks and credit unions can benefit from resources and CECL training to help make the transition in their allowance for loan and lease loss calculations.
5 Benefits of leaving behind an Excel-based ALLL model ahead of CECL: One bank’s story
Each institution must consider its own size and complexity in determining the most appropriate approach to CECL. However, one community bank that decided to shift from an Excel-based model to an automated approach ahead of CECL has identified several benefits from its decision.
CECL within DFAST: What you should know
An upcoming whitepaper and webinar by Garver Moore, Managing Director of Abrigo Advisory Services, will explore differences between the CECL and DFAST exercises; this blog post excerpts a discussion on CECL within DFAST. The discussion thoroughly addresses stress testing projections, adoption dates, and CECL modeling.
CECL segmentation of the loan portfolio
The transition to the current expected credit loss model, or CECL, provides an opportunity to revisit loan portfolio segmentation. In the end, whether financial institutions make wholesale changes or instead determine that their current segmentation is optimal for CECL, institutions will need to document how they arrived at their decisions. Here are some tips for CECL segmentation.
Poll: How 254 financial institutions are approaching Q factors under CECL
During a recent webinar, Abrigo Senior Consultant Tim McPeak and Danny Sharman, an implementation consultant, shared tips to help institutions get prepared for the CECL transition. During the presentation, they also discussed current practices regarding the use of qualitative factors, or Q factors, in the allowance and how to prepare for using Q factors under CECL. A poll of 254 webinar attendees showed that Q factors are a common area of questioning by auditors and examiners.
CECL for community banks: A recap of regulators’ webinar
The FDIC and the Federal Reserve Board (FRB), in conjunction with the Financial Accounting Standards Board (FASB), the U.S. Securities and Exchange Commission (SEC), and the Conference of State Bank Supervisors (CSBS), recently hosted a webinar to discuss how smaller, less complex financial institutions can implement CECL. The purpose of the webinar was to help small financial institutions go from theory to application as they prepare for CECL and to dispel myths often associated with FASB’s new standard.
CECL Transition Workshops to Kick Off in March
As part of a three-pronged approach to help Abrigo’ clients transition to the excepted loss accounting standard, Abrigo will kick off in March 2018 a series of CECL Transition Workshops to take place across the country. These events will be open to all financial institutions, not just those who subscribe to the company’s ALLL solution.
Upcoming Webinar: How a Real Bank is Tackling CECL
On January 30, 2018, Abrigo will host a webinar that answers the question many financial institution leaders are asking: what should a real-life bank with real-life data be doing for the current expected credit loss (CECL) model?
Your credit union CECL committee
If a credit union has not yet formed a committee to oversee CECL implementation, consider including representatives from the board of directors, accounting/finance, information technology, credit analysis, internal audit and risk mitigation.
What credit unions need to know about CECL
Over the course of the next several years, any number of aspects of the financial industry can change. Information security could become tighter to better protect a financial institution’s sensitive data, or restrictions could relax allowing more credit union members access to lines of credit for mortgages or auto loans. One critical change in the landscape, though, isn’t member-facing – transitioning from the incurred loss model to the expected credit loss model in a credit union’s allowance for loan and lease losses (ALLL).
Life of Loan Concept
The more forward-looking CECL model will require institutions to adopt a methodology that takes into account the lifetime of the loan. This will require institutions to gather significantly more data components in order to perform the calculation.
An Update on CECL
Final guidance on the Current Expected Credit Loss (CECL) model has been an anticipated event in the eyes of bankers and other financial professionals. Its release marks the end of the incurred loss model in accounting for expected losses and brings with it a slew of process changes in the way financial institutions collect data and perform their ALLL calculations.
CECL effective dates vary among financial institutions. This post shows a timeline for implementing CECL, including selecting methodologies and validating models, depending on the institution's effective date.
The FASB issued the final CECL standard on June 16, 2016.
Thomas Curry, Comptroller of the Currency, has been on the record stating that banks should expect a 30%-50% increase in their allowance levels upon implementation of the CECL model. This will be a one-time adjustment to capital, not a provision expense.
With the transition to the CECL model, institutions will likely need to rely on archived loan-level detail. This could include individual loan segmentation, individual charge-offs and recoveries, risk ratings by individual loan, loan balances and duration.