Current Expected Credit Loss (CECL)

Current Expected Credit Loss (CECL) is an accounting rule modification, introduced by the US Financial Accounting Standards Board (FASB), which will require banks to put additional reserves aside for expected—rather than incurred—loan and other credit losses in the case of impairment. CECL is calculated using quantitative methods, and will have a material effect on firms’ broader capital adequacy posture and CCAR reporting. Specifically, the new formula asks firms to account for the life of a loan from its origination via quantitative projections, rather than its status at a current point in time. For most accounting teams, this will be a relatively minor change in terms of methodology, and one which can still be broadly designed according to the contour of the institution’s loans business.

What this does mean, however, is that a far larger swath of data will be involved in completing the CECL calculation than in the past, and managing that data will become more crucial than ever given its potential impact on capital adequacy. Implementation isn’t expected until 2018, but firms will want to keep this aspect in mind as they plan for the broader CCAR process, and indeed make CECL-related data as accessible as possible.

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