CECL, or current expected credit loss, is a new accounting standard that estimates expected credit losses by using historical information, current conditions and reasonable forecasts. CECL is considered one of the most significant accounting changes in decades to affect entities that borrow and lend money.

 



CECL’s impact:

Increasing allowances

Larger allowances will be required for most products.

Modified product pricing

Pricing of products will change to reflect higher capital cost.

Changing loss-model

Both data collection and modeling methodology will be impacted.

 

What is CECL?

The CECL model is the new Financial Accounting Standards Board (FASB) standard for estimating and measuring credit losses for loans and debt securities. CECL is a change from the current incurred-loss model and brings with it significantly greater data requirements, including historical data for the life of the loan.

Preparing for and implementing CECL will compel financial institutions to think about credit risk in new and more timely ways and to either recalibrate existing models or develop new ones. Critical components to manage during CECL implementation include data preparation, loan segmentation, methodologies selection and process validation.

 

 

How much time do you have?

CECL has different effective dates based on the type of reporting entity. Public business entities that file financial statements with the Security and Exchange Commission will have to comply by 2020, non-SEC registered companies must comply by 2021 and non-public entity banks, including most credit unions, have until 2022 to adopt the new standard.

What is CECL replacing?

CECL replaces the current Allowance for Loan and Lease Losses (ALLL) accounting standard. Under CECL, entities are required to account for expected losses over the estimated life of the loan, while the existing model relies on incurred losses.

The FASB has high hopes for CECL, stating that the new standard will improve “financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations."

  • CECL regulation FAQ
  • Q: What is required to comply with CECL?

    A: Complying with CECL may require you to gather, store and calculate more data than before. To satisfy CECL requirements, financial institutions will need to focus on end-to-end management, determine estimation approaches that will produce reasonable and supportable forecasts and automate their technology and platforms. Additionally, well-documented CECL estimations will require integrated workflows and incremental governance. Close

    Q: What should organizations look for in a partner that assists in measuring expected credit losses under CECL?

    A: It’s expected that many financial institutions will use third-party vendors to help them implement CECL. Third-party solutions can help institutions prepare for the organization and operation implications by developing an effective data strategy plan and quantifying the impact of various forecasted conditions. The right third-party partner will deliver an integrated framework that empowers clients to optimize their data, enhance their modeling expertise and ensure policies and procedures supporting model governance are regulatory compliant. Close

    Q: What is CECL’s impact on financial institutions? How does the impact for credit unions/small lenders differ (if at all)?

    A: CECL will have a significant effect on financial institutions' accounting, modeling and forecasting. It also heavily impacts their allowance for credit losses and financial statements. Financial institutions must educate their investors and shareholders about how CECL-driven disclosure and reporting changes could potentially alter their bottom line. CECL’s requirements entail data that most credit unions and smaller lenders haven’t been actively storing and saving, leaving them with historical data that may not have been recorded or will be inaccessible when it’s needed for a CECL calculation. Close

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