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The Financial Accounting Standards Board’s new current expected credit loss (CECL) standard is known as one of the biggest changes to bank accounting. Because of the complexities and changes that CECL brings, there are many questions surrounding implementation, potential effects, and more. The Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) have put out a joint statement addressing many frequently asked questions about the new standard. The following are the latest answers the agencies have provided.
There are three different CECL effective dates, depending on an institution’s characteristics:
Financial institutions can expect that allowance levels will likely increase after initial adoption and lower the retained earnings component of equity, the joint report states. The actual effects of CECL, however, will vary by institution.
A final rule modifying regulatory capital rules was approved in December 2018. The rule provides institutions the option to phase in any day-one regulatory capital effects of CECL and revises the agencies’ other rules that reference credit loss allowances to reflect the new standard. Institutions that choose to adopt CECL early may adopt the final rule before the effective date of the final rule.
CECL is effective for fiscal years beginning after December 15, 2021 for non-PBEs. This means that the institution must first apply CECL in its financial statements and regulatory reports, like the Call Report, for the period ending March 31, 2022.
To record the impact of the initial application of CECL when preparing for its first quarter 2022 Call Report:
Assume this institution:
No. An institution should use the collateral’s fair value as of the reporting date, adjusted for estimated costs to sell when applying the practical expedient to determine the allowance for credit losses on a collateral-dependent financial asset. The standard does not allow adjustments for expected future changes in the collateral’s fair value.
An institution should not automatically default to nine quarters as its reasonable and supportable forecast period just because a nine-quarter horizon is used in the stress testing process. Although CECL does not suggest a specific method for estimating reasonable and supportable forecast periods, it makes clear that allowance estimates must be based upon management’s expectations. Every institution should support and document independent of the stress testing process.
No. Forecasts used for estimating expected credit losses under CECL should incorporate economic variables and other factors relevant to the collectability of an institution’s portfolios based on management’s expectations.
If an institution plans to use its stress testing model(s) as a building block in the development of its models for CECL implementation purposes, it should ensure that any modeling differences are factored into the allowance estimation. Additional segmentation factors for revolvers’ credit card loans may include, but are not limited to:
Each financial institution should have internal controls set based on the size of their institution, as well as the nature, scope, and risk of its activities that provide for, among other things, timely and accurate financial, operational, and regulatory reports. This is especially important in regards to data that may not have been used prior to CECL.
There is no specific definition for “smaller and less complex.” Rather, the agencies use the phrase to demonstrate that CECL is scalable to all institutions. Institutions use allowance methods that are scaled to their size and complexity, ranging from simple spreadsheets supporting loss rate methods to complex econometric models. The agencies expect a similar array of credit loss estimation methods will be used when CECL is implemented. Sound policies should be appropriately tailored to the size and complexity of the institution and its loan portfolio.
Yes, many concepts, processes, and practices detailed in existing supervisory guidance on the ALLL will continue to remain relevant under CECL. This includes:
For the full list of FAQs, click here.
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