The New Impairment Model Under IFRS 9 and CECL
First published:
ISBN: 978-1-78272-347-9
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Sources of Modelling Variation in CECL Allowances
Fang Du, Chris Finger, Ben Ranish and Robert Sarama
Introduction
The New Era of Expected Credit Loss Provisioning
The Marking of CECL Standard: Comments and Reflections
Sources of Modelling Variation in CECL Allowances
A CRO’s Perspective: Implementing, Operationalising and Governing of IFRS 9
Implementing Both IFRS 9 and CECL
Macroeconomic Forecasting and Scenario Design for IFRS 9 and CECL
Technology Solutions for CECL and IFRS 9
Implementing IFRS 9: Quantifying Expected Credit Losses in Retail and Wholesale Portfolios
From Incurred Loss to CECL: Historical Perspectives and Practical Guidance
Loss Forecasting Retail and Commercial Portfolios for CECL
Implementing CECL at Small and Community Banks
The New Impairment Model: Audit and Disclosure Challenges
The New Impairment Model: Governance and Validation
The Impacts of CECL: Empirical Assessments and Implications
How the New Impairment Model Could Affect Banks’ Business Models
Measuring and Managing the Impact of New Impairment Models on Dynamics in Allowance, Earnings and Bank Capital
Integration into Regulatory Capital Frameworks
Implications for Equity and Debt Investors
The current expected credit losses (CECL) framework requires firms to adapt their methods for setting loss allowances. While the extent of the changes to those methods will depend in part on firms’ size and complexity, larger and more complex banks may develop or adapt credit-risk models in order to estimate the expected losses that will form the basis for loss allowances. Smaller and less complex institutions are expected to adjust existing allowance methods to meet the requirements of CECL without the use of costly or complex modelling techniques. This chapter describes how the modelling choices facing larger institutions may generate variation in CECL allowances across these institutions.
The CECL framework requires that firms’ loss allowances reflect expected credit losses based on past loss experiences, current economic situations and “reasonable and supportable” forecasts of future economic conditions. Thus, CECL allowances should exhibit “risk-based” variation – that is, variation due to differences in economic conditions or loan and borrower characteristics across institutions. However, the CECL framework is principle-based, imposing few specific requirements on
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