Begin preparing now for CECL, says Federal Reserve

Nov 17, 2015

**The FASB issued the final CECL standard on June 16, 2016. For up-to-date information and resources, access the updated CECL Prep Kit.


Even if the FASB doesn’t implement its current expected credit loss model, or CECL, until 2019 or 2020, the significant effort that will be required for implementation means that banks should be preparing now, Federal Reserve Board staff said recently.

Key staff with the Fed’s Division of Banking Supervision and Regulation said during a conference call with accountants, advisors and vendors that the Fed’s message to its examiners lately has been that they should encourage banks to be familiar with the standard and to begin discussion among peer institutions, auditors and regulators. Examiners are also being instructed to advise banks to begin thinking about the data they will need to implement the standard and to begin collecting whatever they may need.

“We are not doing exams on any early implementation,” said Steve Merriett, the Fed’s chief accountant and deputy associate director of its Division of Banking Supervision and Regulation. Examiners aren’t issuing exam findings or Matters Requiring Attention (MRAs) or Matters Requiring Immediate Attention (MRIAs) as they meet with bankers to discuss CECL, he added. “This is purely a preparatory effort,” he said, encouraging institutions to “get ready for what’s coming and prepare.”

Merriett said the new accounting standards represent a fundamental change in accounting requirements for bankers. “This is not a tweak, and we do not believe that existing methodologies are OK without any adjustment.”

Implementing the new credit-impairment standards will require a “significant effort” by the Fed and by its reporting institutions, he said. In recognition that many smaller banks are concerned about implementation, regulators want to get information out as early as possible, Merriett added. “We think bank management will need to plan for the larger allowance levels we expect under the new standard.”

Here are nine steps the Fed has encouraged institutions to take as they await the final guidance and details on implementation timing:

  1. Become familiar with the proposed accounting standard
  2. Discuss the proposed accounting changes with external auditors and industry peers
  3. Involve all areas within your company to identify data points and any potential system changes
  4. Review current ALLL and credit risk management practices to identify processes that might be leveraged
  5. Begin collecting data for all existing credits as well as any new loan originations that might be used in a lifetime expected credit loss model
  6. Begin drafting an initial, high-level plan for CECL implementation
  7. Continue following existing GAAP guidance for maintaining the allowance until the new rule is effective
  8. Don’t build allowance balance in anticipation of transitioning to CECL beyond those appropriate under GAAP
  9. Begin evaluating capital levels to ensure they will be sufficient to support the implementation of CECL on day one