Credit Cycles and CECL Implications: Expected-credit-loss calculations must take potential downturns into account

Expected-credit-loss calculations must take potential downturns into account.
  • 16 Noviembre 2017

Current loan-loss reserving has been deemed by some in the industry to be backward-looking, as it seeks to identify losses that have been “incurred” but not fully manifested — a criticism that some observers believe resulted in bank failures during the financial crisis. Under the current approach, incurred losses of one period might represent only a fraction of the losses likely to occur in the next period if the economic conditions deteriorate.

To address this shortcoming, the Financial Accounting Standards Board issued a new standard in June 2016. Institutions will provision for losses not only using current and historical loss information, but will also incorporate forward-looking economic conditions as part of the reserve. The expected implementation date for the new standard is January 2020 for U.S. Securities and Exchange Commission-filing institutions.

Read more