CECL Greatest Hits

A collection of papers to help drive the adoption of the CECL standard

In June of 2016, the Financial Accounting Standards Board (FASB) issued the new accounting standard ASU 2016-13-Financial Instruments-Credit Losses (Topic 326); commonly known as CECL (for Current Expected Credit Losses). The standard was a long time in the making, having originally been considered as the financial crisis wound down nearly 7 years prior. From the very onset of the discussion about a new way to measure expected credit losses for accounting purposes, the industry prepared for the impact to be considerable.

The impact was not only a change in the actual amount of reserves on the Balance Sheet; but, also the process required to be able to quantify the estimate. There are concepts introduced within the accounting standard such as forecast and reversion periods, as well as completeness requirements not typically considered as part of an allowance estimate.

Given the level of change and the challenges the industry was facing in getting the new standard adopted, a wealth of information, education and opinions were provided in the marketplace. While much of this information was useful and timely, it also is overwhelming to look back upon as we near the final effective date. Therefore, Moody’s Analytics is providing this index of our contect for reference; such that readers can quickly identify the correct piece of insight for their particular need as it relates to CECL adoption.

The accounting view

The following table provides an index of papers that relate to the CECL accounting guidance. This collection of papers provide readers with instruction for working with the requirements of the accounting standard as well as useful information about how the industry is putting the accounting guidance into practice.

Title Topics Author(s)
Accounting for Purchased Credit Deteriorated Financial Assets PCD assets treatment Masha Muzyka
After the CECL Transition After the CECL Transition: Now Comes the Hard Part Scott Dietz
CECL methodologies Exploring different CECL methodologies: Cohort level and loss rate models Sohini Chowdhuri
CECLnomics-and-the-promise-of-countercyclical-loss-accounting In this study, we address these shortcomings by utilizing data that track loan volume and performance to ascertain CECL’s cyclical impact Cris Deritis
Discounted-cashflow CECL methodologies – discounted cashflow approach Sohini Chowdhuri
Fair-value-option Electing the Fair Value Option Instead of CECL? Know the Risks Sohini Chowdhuri
Gauging-cecl-cyclicality We provide empirical support for the conclusion that the CECL standard will be less procyclical than the incurred loss standard. CECL will achieve its goal of encouraging lenders to reserve for eventual losses earlier in the lifecycle of their loans than they do today. Cris Deritis, Mark Zandi
Reporting-cecl-seismic-shift Reporting and CECL: A Seismic Shift for Accountants Scott Dietz
The Impact of Assumptions on the CECL Estimate CECL - What is the impact to our bottom line?” Masha Muzyka
Economic factors

One of the most significant changes that CECL brought about to the accounting department is the use of economic forecasts within an accounting estimate. The following table provides an index of papers specific to the use of economic factors, forecasts or scenarios within the CECL process and the resulting allowance estimate.

Title Topics Author(s)
A-practical-guide-to-using-forecasts-for-cecl Beyond Theory: A Practical Guide to Using Economic Forecasts for CECL Estimates Sohini Chowdhuri, Cris Deritis
CECL-based-on-the-consensus This paper compares and contrasts, through the CECL lens, the two baseline scenarios Moody’s Analytics produces monthly: the Moody’s Analytics baseline and the consensus baseline. Sohini Chowdhuri
CECL forecast-uncertainty Concerned With Forecast Uncertainty in CECL? Look Beyond the Baseline Sohini CHowdhuri, David Fiedlhouse
CECL-using-a-reasonable-and-supportable-forecast Elements of using a reasonable and supportable forecast for your CECL process Sohini CHowdhuri, Robby Holditch, Chris Henkel
Constant-severity-scenarios Defining Economic Scenarios With Constant Severities Cris Deritis
Deconstructing-scenario-weights-for-cecl This paper presents the theoretical motivation behind these weights and suggests reasonable ways of choosing these weights in practice. Sohini Chowdhuri, Cris Deritis
Producing-reasonable-and-supportable-cecl How to make estimates defendable Eric Bao, Cris Deritis, Yashan Wang
Mean-Reversion-in-CECL Mean Reversion in CECL: The What and the How Sohini Chowdhuri, Cris Deritis
Reasonable-and-supportable-from-principles-to-practice Reasonable-and-supportable-from-principles-to-practice Sohini Chowdhuri, Cris Deritis
Portfolio considerations

CECL was a foundational change in the accounting space and it brought with it many changes within the accounting process across institutions. In addition to changes in just the accounting however, the adoption of CECL also yielded different results by asset class and/or asset structure. As a result, many institutions found themselves looking at the effect of the standard on their portfolio and strategy. The following table provides an index of papers that relate to individual asset types as well as portfolio construction.

Title Topics Author(s)
Cards and CECL estimates Why are cards driving CECL estimates up, and what can we expect from other institutions?1 Laurent Birade, David Fieldhouse
CECL impact study of COVID-19 Case Study: Allowance impact of COVID-19 on C&I, CRE, and Retail portfolios under CECL Eric Bao, David Fiedlhouse, Jin Oh, Yashan Wang
CECL loss pooling CECL: Determining Correct Segments for Loss Pooling Sohini Chowdhury
CECL treatment for the investment portfolio Requirements and methodologies for HTM and AFS debt securities under CECL David Kurnov, Nihil Patel
Concentration Risk Considerations Concentration Risk Consideration During the Allowance Process and COVID-19’s Impact Amnon Levy, Masha Muzyka, Pierre Xu
COVID-19 credit risk impact CRE Coronavirus (COVID-19): Credit Risk Impact on Commercial Real Estate Loan Portfolios Eric Bao, Jun Chen, Arka Kundu, Junrong Liu, Wenjing Wang
Improving Risk Ratings in Preparation for CECL Specific steps financial institutions can take to build meaningful risk ratings that lead to more precise loss calculations and better, more informed decisions. Christian Henkel
Qualitative overlay factors for CRE credit risk models Qualitative Overlay Factors for CRE Credit Risk Models in the Context of COVID-19 Eric Bao, Jake Carr, Jun Chen
Unfunded Commitments: Unintended Consequences in Times of Turmoil Understanding the consequences of large drawdowns in times of need Laurent Birade, James Partridge, Alex Cannon

The requirements of CECL have many facets, including the use of forecasted considerations, that had not been used in prior allowance estimates. These new requirements have driven challenges for institutions in justifying their allowance balances without the use of benchmarking. The following table provides an index of papers that relate to benchmarking a CECL estimate; including best practices as well as actual periodic industry results.

Title Topics Author(s)
CECL Adoption and Q1 Results Amid COVID-19 Compiled results from a select number of firms to inform you of the various impacts due to the adoption of CECL and the subsequent economic downturn from COVID-19. Phillip Lai, Sam Rosenblum
CECL Build – Is it Enough? A framework to understand the extent of your allowance Laurent Birade, Phillip Lai
CECL Benchmark Q4 2020 A framework to understand the extent of your allowance (updated for Q4 2020) Laurent Birade, Scott Dietz, Phillip Lai
CECL Benchmark Q4 2021 A framework to understand the extent of your allowance (updated for Q4 2021) Laurent Birade, Scott Dietz, Phillip Lai
ILM vs. CECL: What’s the Difference? Analysis of allowance fluctuatations over the first three quarters of 2020 overall and by high-level product category, comparing CECL and incurred loss Laurent Birade, Phillip Lai
Leveraging Historical Loss Data for CECL Introducing the Historical Loss Analyzer (HLA), a toolkit within Moody’s Analytics ImpairmentStudio™, and how to leverage public or internal data of a bank or its peer group to help address CECL requirements. Laurent Birade, Yashan Wang, Warren Xu
Playing the Waiting Game with CECL Reserves and Loss Emergence A statistical analysis on loss emergence by asset category types and a detailed review of the consumer asset class. Laurent Birade, James Partridge, Anna Rapoport, Chris Stanley
CECL Benchmarking for Portfolio Management Provides insights into the importance and benefits of benchmarking a CECL estimate Chris Stanley, Scott Dietz
CECL Benchmark Q1 2022 A framework to understand the extent of your allowance (updated for Q1 2022) Laurent Birade, Scott Dietz, Phillip Lai
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