What is CECL?
CECL (Current Expected Credit Loss) is a new accounting rule set by the Financial Accounting Standards Board (FASB). It changes how banks and other financial institutions calculate potential loan losses.
Key points about CECL:
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Replaces the old "incurred-loss" model
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Requires estimating losses for the entire life of a loan
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Uses historical data and current economic conditions
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Aims to improve financial reporting and risk management
Why CECL matters
CECL is important for several reasons:
| Reason | Description |
|---|---|
| Better financial reporting | Shows a clearer picture of credit risk |
| Improved risk management | Encourages banks to assess risk more carefully |
| Impact on capital planning | Affects how much money banks need to set aside |
CECL requires banks to:
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Gather more data on loans
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Update their accounting systems
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Rethink how they manage credit risk
For banks, following CECL rules is not just about meeting regulations. It's also about staying competitive and managing risks better in the long run.
CECL timeline
Important dates
The CECL standard has changed how financial institutions handle credit losses. Here are the key dates:
| Type of Institution | Start Date |
|---|---|
| Public companies (SEC filers) | January 1, 2020 |
| Smaller public banks | January 1, 2023 |
| Private banks and credit unions | January 1, 2023 |
Banks need to know these dates to follow the rules and avoid fines. Most private companies have already started using CECL, so now it's about doing it well and keeping up with the rules.
Steps for implementation
To use CECL correctly, banks should follow these steps:
1. Find all contracts
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List all loans and credit risks
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This helps figure out possible losses
2. Make loss models
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Use past data and current money trends
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Create ways to guess future losses
3. Write everything down
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Explain how you made your guesses
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Keep records for when regulators check
4. Change financial reports
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Update how you show money information
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Explain clearly how you guess losses
5. Keep checking and fixing
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Look at loss guesses often
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Change your methods when needed
Key parts of CECL compliance
Data needs and management
To follow CECL rules, banks need good data. This includes:
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Past loan losses
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Customer credit info
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Types of collateral
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Economic data (like job rates)
Banks should:
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Check what data they have
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Find missing information
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Make sure data is correct
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Keep data up-to-date
Good data helps banks group loans and guess future losses better.
Choosing and building models
Banks can pick different ways to guess loan losses. Some common methods are:
| Method | Description |
|---|---|
| Discounted cash flow | Looks at future money from loans |
| Loss-rate | Uses past loss rates to guess future ones |
| Probability-of-default | Guesses how likely loans won't be paid back |
Small banks might use simple Excel sheets. Big banks might need more complex systems. Banks should test their chosen method to make sure it works well.
Assessing risk and forecasting
CECL asks banks to think about future money problems. This means:
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Looking at current money trends
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Thinking about what might happen in the future
Banks should:
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Use past loss data
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Watch economic signs
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Change their guesses when needed
This helps banks guess future losses better and follow CECL rules.
Record-keeping and reporting
Banks must keep good records and tell others about their CECL work. This includes:
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Writing down how they guess losses
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Explaining why they made certain choices
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Updating financial reports to show CECL changes
Good record-keeping helps during checks by regulators. Clear reporting helps everyone understand the bank's financial health.
CECL methods
Approved methods overview
CECL lets banks use different ways to guess future loan losses. Here are the main methods:
| Method | What it does |
|---|---|
| Discounted Cash Flow (DCF) | Guesses future loan payments and adjusts for time |
| Loss Rate | Uses past loss numbers to guess future ones |
| Weighted Average Remaining Maturity (WARM) | Applies yearly loss rate to how fast loans are paid off |
| Probability of Default (PD) | Guesses how likely loans won't be paid back |
Banks can pick the method that works best for their loans and systems.
Comparing different methods
Each CECL method has good and bad points:
| Method | Good points | Bad points |
|---|---|---|
| DCF | Shows detailed future payments | Needs lots of data, hard to set up |
| Loss Rate | Easy to use for small loan groups | Might miss differences in loan risks |
| WARM | Simple for small banks | Not great for different types of loans |
| PD | Looks at many risk factors | Needs good data on unpaid loans |
Knowing these differences helps banks choose the right method.
How to pick the right method
To choose the best CECL method:
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Look at your loans: What types do you have? How risky are they?
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Check your data: What info do you have about past loans?
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Think about your bank's skills: Can you handle complex methods?
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Try it out: Test the method against old data to see if it works well
How Forecast360 can help?
At Forecast360, we've streamlined CECL compliance to make it easier for your bank. By aggregating over 20+ years of public data—from call reports to FDIC records—we deliver an out-of-the-box model tailored to your institution's needs. Our solution offers a high level of flexibility, allowing you to incorporate data from relevant peer banks, ensuring that your models are built on meaningful historical data.
If you're seeking a solution that simplifies CECL compliance while providing robust, customized modeling, we invite you to reach out to us.
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