Could CECL changes be coming?
Content Type: Regulations
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.
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.
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.
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.
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.
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 (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.
Most financial institutions understand CECL, and more specifically applying the CECL model to their loan portfolio, represents the most significant accounting change for financial institutions in recent memory. However, there is less comfort over how the standard will specifically affect each institution.
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?
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.
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.