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

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News

    BCBS Report Examines Impact of Basel III Framework for Banks

    The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.

    February 28, 2023 WebPage Regulatory News

    PRA Consults on Prudential Rules for "Simpler-Regime" Firms

    Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.

    February 28, 2023 WebPage Regulatory News

    DNB Publishes Multiple Reporting Updates for Banks

    DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.

    February 28, 2023 WebPage Regulatory News

    NBB Sets Out Climate Risk Expectations, Issues Reporting Updates

    The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting

    February 24, 2023 WebPage Regulatory News

    EBA Updates Address Securitization Standards and DGS Guidelines

    The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.

    February 21, 2023 WebPage Regulatory News

    FSB Publishes Letter to G20, Sets Out Work Priorities for 2023

    The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023

    February 20, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8793