11 Feb The Latest Regulatory Guidance on CECL
The Latest Regulatory Guidance on CECL
The FDIC, the OCC and the Federal Reserve issued frequently asked CECL questions (and answers) for banks in December. Among the highlights:
- CECL will cause an earlier recognition of credit losses. That’s because CECL removes the “probable” and “incurred” notion thresholds, meaning that there will be new triggers used for recognizing credit losses. While the total amount of net chargeoffs on financial assets does not change, the timing of credit losses will happen sooner.
- CECL is forward-looking. This is key. The new standard broadens the range of data that must be considered to estimate credit losses, requiring not just historical and current conditions but also forecasts “that affect expected collectability.”
- CECL does not require vintage disclosure for nonpublic community banks. (In our opinion, vintage analysis is the best way for banks to implement CECL). “Acceptable methods include loss rate, roll-rate, vintage analysis, discounted cash flow, and probability of default/loss given default methods. Neither a vintage nor a discounted cash flow method is required for estimating expected credit losses. Additionally, an institution may apply different estimation methods to different groups of financial assets. To properly apply an acceptable estimation method, an institution’s credit loss estimates must be well supported.”
- CECL will affect how banks account for troubled debt restructuring (TDRs). The new standard means that “credit losses on TDRs should be calculated under the same expected credit loss methodology that is applied to other financial assets carried at amortized cost – in other words, under CECL.”
- Banks do not need third-party vendors to help measure their expected credit losses under CECL.
- CECL will require more data collection. “Depending on the estimation method or methods selected, institutions may need to capture additional data and retain data longer than they have in the past on loans that have been paid off or charged off to implement CECL.”
- Although CECL won’t go into effect for several more years, regulators recommend that banks begin evaluating and planning now for “the potential impact of the new accounting standard on regulatory capital.”