Incurred loss versus Expected loss- CECL is “the biggest change ever to bank accounting.”

“CECL is now a well-known acronym in the banking world.  It stands for “Current Expected Credit Loss (Model)”.  Currently, the Financial Accounting Standards Board (FASB) requires an incurred loss accounting model.  The new CECL regulation will shift this to an expected loss model by 2020 (for most banking entities.  Many regulators have said that CECL is “the biggest change ever to bank accounting.”

Currently, and for the past several decades, banks have been using incurred loss modeling standards.  A loan becomes impaired when the loan, for whatever reason, becomes worth less than the market is willing to pay for it. The impairment incurred by these loans is currently measured in pools using charge-off rates.

Under CECL regulations, banks will need to forecast according to the life of the loan.  They will need to anticipate which loans are more likely to become impaired, requiring an “expected loss” model. It is a predictive, forward facing model that will require much more detailed data.   For example, annual loss rates will no longer be the only thing required.  Life of loan or life of portfolio loss rates involving many other factors and variables will now need to be gathered, stored, tracked and analyzed for the expected loss model.

Stated more briefly, were incurred loss accounting essentially reflects the current losses in a portfolio, CECL reflects the current risk in the portfolio, which includes both current and future impairment.

Oakwood Search can help you keep costs down by hiring SMEs in data management and IT and quantitative modeling professionals to help get these projects on the move without having to hire full-time resources.  We can help get the right executives in place to begin these game-changing projects and get you ready for the 2020 deadline.

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