CECL’s unintended consequences begin to surface

One of the first unintended consequences of CECL has surfaced only a few months after the issuance of the final standard.

The current expected credit loss model, or CECL, is an accounting standard that will change the way banks account for losses on assets such as loans and securities. For loans, banks will move from an approach that books losses when they become likely to be incurred to one that books the expected lifetime of losses on the first day of origination. The standard may require banks to increase the amount of data they use in order to forecast loan performance and could cause some to change the way they model losses.

Sydney Garmong, managing partner at Crowe Horwath and chair of the American Institute of CPAs’ depository institution expert panel, told a group of executives at the Crowe Horwath Bank Leadership and Profitability Improvement Conference on Aug. 15 that the credit loss change is the “biggest change in banking” in 40 years and promised it would be complicated. The change will also universally impact depository institutions.

“Unless you’re the Treasury or Warren Buffett, you need to have an allowance,” she said.

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