Current Expected Credit Losses (CECL): How to Calculate and Maintain a Proper Allowance
This is the description from our webinar that was presented in July 2017. Please check back for a modified description. Topics may be updated, but registration is now open.
The Allowance for Loan and Lease Losses (“ALLL”), represents one of the most significant estimates in an institution’s financial statements and regulatory reports. It is a major portion of credit administration and is considered a key factor in maintaining a safe and sound financial institution. It is a valuation reserve established and maintained by charges against the bank’s operating income and is estimate of loans that may be uncollectible.
However, users of financial statement issued by financial institution expressed concerns that current United States Generally Acceptable Accounting Principles (GAAP) calculation of the Allowance restricts the ability to record credit losses that are expected, because they do not meet the “probable” threshold. After the economic crisis, various stakeholders requested that accounting standards enhance standards on loan loss provisioning to incorporate forward-looking information. The Financial Accounting Standards Board concluded that the existing approach for determining the impairment of financial assets, based on a “probable” threshold and an “incurred” notion, delayed the recognition of credit losses on loans and resulted in loan loss allowances that were “too little, too late.”
The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) (hereafter, the agencies) issued a Joint Statement on June 17, 2016, called Current Expected Credit Losses (“CECL”), which summarizes key elements of the new accounting standard and providing initial supervisory views with respect to measurement methods, use of vendors, portfolio segmentation, data needs, qualitative adjustments, and allowance processes.
CECL standards apply to all banks, savings associations, credit unions and financial institution holding companies, regardless of size that file regulatory reports for which the reporting requirements conform to U.S. GAAP. This program is designed to review the elements and thought process in establishing and maintaining an adequate ALLL level under the new regulatory guidance referred to as CECL.