Featured Product

    FED Paper Examines Impact of Current Expected Credit Loss Standard

    August 09, 2019

    FED published a working paper that examines the accounting and economic impact of the Current Expected Credit Loss (CECL) standard. The paper presents a framework that captures a simple and relatively direct impact of CECL on credit availability. The CECL standard will soon replace the incurred loss method (ILM) for the recognition of credit losses in financial accounts. The resulting changes to the timing and magnitude of loss allowances will affect the regulatory capital of banks. As the date of implementation approaches, several commentators have raised concerns that the standard will have a “procyclical” impact, reducing lending in downturns. In contrast, the findings in this study suggest that CECL will modestly affect bank lending in a way that dampens fluctuations.

    The paper highlights that CECL results in earlier accumulation of allowances prior to recessions than the ILM. This feature of the standard encourages banks to deleverage and raise capital before credit conditions are at their tightest. However, CECL may also result in a larger accumulation of allowances around recessions, potentially encouraging banks to deleverage more. Accounting for both of these effects, CECL would have reduced lending in the lead up to the financial crisis and increased it during the recovery, modestly decreasing the volatility of lending growth. These conclusions are robust to a range of assumptions about banks’ foresight of losses and management of capital ratios. The framework presented in this paper does not incorporate potential effects of CECL on the composition of bank lending and loan pricing., which  could further reduce cyclicality. The analysis may overstate the magnitude of the impact of CECL to the extent that

    • Banks have significant discretion when modeling CECL allowance for credit losses
    • Banks are indifferent to the shorter-term shifts between allowances
    • Capital implied by CECL or the capital impact at banks subject to comprehensive capital analysis and review (CCAR) is roughly offset by reductions in the modeled stress losses

     

    Related Links

    Keywords: Americas, US, Banking, Accounting, CECL, Regulatory Capital, Incurred Loss Method, CCAR, Research, IFRS 9, FED

    Featured Experts
    Related Articles
    News

    HKMA Sets Out Regulatory Treatment for Personal Loan Guarantee Scheme

    HKMA has published a circular that sets out the regulatory and reporting treatment for loans that participating authorized institutions may grant to eligible borrowers under the 100% Personal Loan Guarantee Scheme.

    April 20, 2021 WebPage Regulatory News
    News

    ECB Completes Targeted Review of Internal Models of Banks

    ECB published the results of the assessment of internal models that banks use to calculate risk-weighted assets for credit, market, and counterparty credit risks.

    April 19, 2021 WebPage Regulatory News
    News

    PRA on Regulatory Treatment of Loans Under Mortgage Guarantee Scheme

    PRA published a statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme, or MGS.

    April 19, 2021 WebPage Regulatory News
    News

    FCA Consults on Rules and Reporting Forms for Investment Firms Regime

    FCA is consulting, via CP21/7, on the second phase of proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR).

    April 19, 2021 WebPage Regulatory News
    News

    HMT and BoE Decide to Explore Central Bank Digital Currency in UK

    HM Treasury and BoE announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential central bank digital currency in UK.

    April 19, 2021 WebPage Regulatory News
    News

    EIOPA Sets Out Expectations on Use of Climate Risk Scenarios in ORSA

    EIOPA published an opinion to set out its expectations on the supervision of the integration of climate change risk scenarios by insurers in their Own Risk and Solvency Assessment (ORSA).

    April 19, 2021 WebPage Regulatory News
    News

    EC Sets Out Standards for MREL Reporting by Competent Authorities

    EC published the Implementing Regulation 2021/622 that lays down implementing technical standards for reporting of the minimum requirement for own funds and eligible liabilities (MREL).

    April 16, 2021 WebPage Regulatory News
    News

    BCBS to Advance Work on Suptech, Climate Risk, and Basel Monitoring

    BCBS has set out the strategic work priorities, as part of its the work program for 2021-22.

    April 16, 2021 WebPage Regulatory News
    News

    Bundesbank Updates AnaCredit Reporting Requirements

    Bundesbank published two circulars on AnaCredit reporting requirements. Circular 27/2021 covers changes to the reporting of branches, additional attributes to be reported for investment funds from August 01, 2021, and updates to the list of international organizations.

    April 16, 2021 WebPage Regulatory News
    News

    PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK

    PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.

    April 15, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6874