What Basel says about expected credit loss

The phrase “expected credit loss” (ECL) is one that bankers will be hearing a lot more of in the coming months. Currently, financial institutions adhere to the incurred loss model for their allowance for loan and lease losses (ALLL). However, final guidance on the FASB’s Current Expected Credit Loss (CECL) model is anticipated to be released this year, so many banks and credit unions are beginning to seek information about the model and plan for the transition.

In response to the IASB’s and FASB’s shift to an expected loss model, the Basel Committee on Banking Supervision (BCBS) issued guidance on accounting for ECL in early February. The Basel guidance notes the objective “is to set out supervisory requirements on sound credit risk practices associated with the implementation and ongoing application of expected credit loss (ECL) accounting models.” The guidance provides a framework for both financial institutions and regulators with respect to implementing expected credit loss models.

The Basel document included an appendix for financial institutions implementing IFRS 9 Financial Instruments, the International Accounting Standards Board’s (IASB’s) expected credit loss model which will go into effect January 1, 2018. The main principles relayed in the guidance, however, are equally applicable under all accounting frameworks, inclusive of FASB. As such, many American bankers view the document as the most recent “piece of the puzzle” in deciphering what the CECL model means for them.

During a recent educational webinar, Sageworks partnered with Grant Thornton, one of the world’s leading organizations of independent audit, tax and advisory firms, to explain the key principles from the recent guidance, along with the most significant ways it may impact banks and credit unions. The presenters discussed how financial institutions can prepare for the transition, and offered insight into certain practices that may facilitate their transition to an expected credit loss model.

Bank and credit union professionals left the webinar with a greater understanding of items that will likely require planning on the part of senior management or the board. These items include, but are not limited to, model validation, scenario analysis, incorporation of new, forward-looking calculation components and the need to bolster their data gathering and credit risk practices.

To learn more about the key principles covered and items to incorporate into your strategic plan, listen to the recorded webinar, “What Basel says about Expected Credit Loss (ECL).”

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