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Whitepaper

A Composite Capital Measure Unifying Business Decision Rules in the Face of Regulatory Requirements Under New Accounting Standards

Prudent credit risk management ensures institutions maintain sufficient capital and limit the possibility of a capital breach. With CECL and IFRS 9, the resulting trend toward greater credit earnings volatility raises uncertainty in capital supply, ultimately causing an increase in required capital. It is ever more challenging for institutions to manage their top-of-the house capital while steering their business to achieve the desired performance level. This paper introduces an approach that quantifies the additional capital buffer an institution requires, beyond the required regulatory minimum, to limit the likelihood of a capital breach. In addition, we introduce a new measure that allocates capital and recognizes an instrument's regulatory capital requirements, loss allowance, economic concentration risks, and the instrument's contribution to the uncertainty in capital supply and demand. In-line with the Composite Capital Measure introduced in Levy and Xu (2017), this extended measure includes far-reaching implications for business decisions. Using a series of case studies, we demonstrate the limitations of alternative measures and how institutions can optimize performance by allocating capital and making business decisions according to the new measure.

May 2018 Pdf Dr. Amnon Levy, Xuan Liang, Dr. Pierre Xu
Whitepaper

Measuring and Managing the Impact of IFRS 9 and CECL Requirements on Dynamics in Allowance, Earnings, and Bank Capital

Reserving for loan loss is one of the most important accounting aspects for banks. Its objective is to cover estimated losses on impaired financial instruments due to defaults and non-payment. Reserve measurement affects both the balance sheet and income statement. It impacts earnings, capital, dividends and bonuses, and attracts the attention of bank stakeholders ranging from the board of directors and regulators to equity investors. In response to the so-called “too-little, too-late” problem experienced with loan loss reserve during the Great Financial Crisis, accounting standard setters now require that banks provision against loan loss based on expected credit losses (ECL). Arguably, calculating the Expected Credit Loss Model under IFRS 9 and CECL presents a momentous accounting change for banks, with the new standards coming into effect sometime between 2018 and 2021, depending on the jurisdiction.

March 2018 Pdf Dr. Amnon Levy, Dr. Jing Zhang
Article

The Impact of CECL's Financial Reporting Requirements

FASB's new accounting standard will have a significant effect on financial statements. Financial institutions must educate their investors and shareholders about how CECL-driven disclosure and reporting changes could potentially alter the bottom line.

November 2017 Pdf Masha Muzyka
Whitepaper

Economic Scenarios: What's Reasonable and Supportable?

In this paper, we review and make recommendations on the use of economic scenarios in the CECL process along six key dimensions: FASB requirements, Forecast methodology and horizon definition, number of scenarios, mean reversions and custom scenarios. We conclude with a discussion of other considerations banks and lenders should bear in mind when developing a forward-looking process for CECL compliance.

October 2017 Pdf Dr. Cristian deRitis
Article

CECL: What's on Tap for the Future of Credit Loss Accounting?

A new model for expected credit losses is supposed to fix flaws in the accounting system and protect against future financial crises. But the so-called CECL model comes with its own set of challenges that will dramatically change firms' accounting practices for impaired loans. The Financial Accounting Standard Board's (FASB) recently issued current expected credit loss (CECL) model attempts to align measurement of credit losses for all financial assets held at amortized cost, and specifically calls out potential improvements to the accounting for purchased credit impaired (PCI) assets.

July 2017 Pdf Masha Muzyka
Article

Predicting Earnings: CECL's Implications for Allowance Forecasts

In this article, we demonstrate the effect of the new allowance framework by quantifying allowances and credit earnings volatility for a sample portfolio.

July 2017 WebPage Joy Hart, Anna Labowicz
Article

Accounting for Purchased Credit Deteriorated Financial Assets: Current and Future GAAP

In this article, we explore existing and future accounting and operational challenges faced by institutions acquiring financial assets with credit deterioration.

July 2017 WebPage Masha Muzyka
Article

What Do Half a Million Loans Say About the Impact of CECL on Loan Loss Allowance?

In this article, we use historical data to calculate and compare loan- and portfolio-level loss allowances under the incurred loss model and CECL.

July 2017 WebPage Dr. Yanping Pan, Dr. Yashan Wang
Article

Predicting Earnings: CECL's Implications for Allowance Forecasts

The new CECL and IFRS 9 accounting standards will require financial institutions to adjust loss allowances based on forward-looking expectations and calculate lifetime losses. In this article, we demonstrate the effect of the new allowance framework by quantifying allowances and credit earnings volatility for a sample portfolio. Our case study finds that along with a shift in the level of allowance, portfolio dynamics and concentrations play an increasingly important role in understanding and communicating expected performance and earnings.

June 2017 Pdf
Article

How Lenders Can Adapt Estimated Credit Loss Methodologies for CECL

This article provides an overview of the CECL Quantification: Commercial & Industrial Portfolios webinar, discussing the common methodologies for estimating credit losses in C&I lending and how to adapt methodologies to be more forward-looking and compliant with CECL requirements.

May 2017 Pdf
Article

Infographic - Preparing for CECL

Banks are taking various approaches as they prepare for implementation of the new Current Expected Credit Loss (CECL) standard.

April 2017 Pdf
Article

Preparing for the New Impairment Requirements: A Practitioner's View

This article describes the new standards set forth by the FASB. It covers the history of the ALLL and explains how the recent financial crisis highlighted the need for new standards.

June 2016 WebPage Christian Henkel, Emil Lopez
Article

How to Unlock Benefits from CECL Compliance: 5 Principles

The primary objective of FASB's CECL standard is to provide investors with more meaningful and timely information regarding credit risk, but it also presents a unique opportunity for financial institutions to advance credit risk practices, break down silos and strengthen business decisions. What steps can your organization take to extract value from CECL, beyond compliance?

Pdf Eric Ebel, Emil Lopez
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