CECL: CECL is the accounting standard that makes a bank reserve for the losses it expects over a loan’s entire life, starting the day the loan is booked.
Where it comes from
Current Expected Credit Losses, issued as ASU 2016-13 and effective for every bank by 2023. It replaced the incurred loss model, under which a bank could not reserve until a loss was probable. Under CECL the reserve is set at origination from historical experience, current conditions, and a reasonable and supportable forecast.
How to read it
CECL moved provisioning forward in time. A bank that grows its loan book now takes the provision in the quarter it grows, before a single new loan has had a chance to go bad, which makes a good growth quarter look worse on earnings than it used to.
The common mistake. Reading a rising allowance as deteriorating credit. Under CECL it can equally mean growth, a change in mix, or a gloomier forecast, and none of those is a loan going wrong.
Go deeper
- Allowance for credit losses benchmarks
- BankingLens pricing and what a subscription adds: percentile rank against the bank’s own FFIEC peer group, fourteen quarters of trend, and the flags an examiner reaches for first.
See also. Allowance for credit losses, Charge-off, Nonaccrual.
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