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Current Expected Credit Loss Standards (CECL)

Compliance and Operational Challenges with the Current Expected Credit Loss Standard

ABA Position

The Financial Accounting Standards Board’s Current Expected Credit Loss impairment standard – which requires “life of loan” estimates of losses to be recorded for unimpaired loans -- poses significant compliance and operational challenges for banks. Issued in June 2016, and set to take effect in 2020 for large SEC registrants (2023 for all other banks), the new standard represents the most sweeping change to bank accounting ever.

While initially requested by worldwide banking agencies to decrease procyclicality in the banking industry, banks and other financial companies are finding—through the testing of their estimation models—that CECL would actually increase procyclicality and perhaps significantly. By increasing procyclicality into the banking system, CECL will cause economic downturns to be more severe and to last longer. This will increase the cost and decrease the availability of credit, especially to consumers and to those borrowers of non-prime credit quality or those who rely on loans with longer terms. It also increases the challenge for banks to manage their capital and investors to assess bank performance. As a result, ABA has called for FASB, banking regulators, and the SEC to perform a quantitative impact study to better understand the problem and to assess measures to mitigate the unintended consequences.

The “life of loan” credit loss concept also presents operational complexities that can significantly increase costs at banks of all sizes. ABA is a thought-leader in CECL and publishes discussion papers related to CECL implementation concepts, provides other CECL-related resources, holds periodic CECL conference calls, and also sponsors the ABA CECL Network, a 1,000+ member-only group-site for banks to exchange ideas and to discuss key CECL implementation issues.

While initially requested by worldwide banking agencies to decrease procyclicality in the banking industry, banks and other financial companies are finding—through the testing of their estimation models—that CECL would actually increase procyclicality and perhaps significantly. By increasing procyclicality into the banking system, CECL will cause economic downturns to be more severe and to last longer. This will increase the cost and decrease the availability of credit, especially to consumers and to those borrowers of non-prime credit quality or those who rely on loans with longer terms. It also increases the challenge for banks to manage their capital and investors to assess bank performance. As a result, ABA has called for FASB, banking regulators, and the SEC to perform a quantitative impact study to better understand the problem and to assess measures to mitigate the unintended consequences.

The “life of loan” credit loss concept also presents operational complexities that can significantly increase costs at banks of all sizes. ABA is a thought-leader in CECL and publishes discussion papers related to CECL implementation concepts, provides other CECL-related resources, holds periodic CECL conference calls, and also sponsors the ABA CECL Network, a 1,000+ member-only group-site for banks to exchange ideas and to discuss key CECL implementation issues.

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Current Expected Credit Loss (CECL) Accounting Standard

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