The New Impairment Model Under IFRS 9 and CECL
First published:
ISBN: 978-1-78272-347-9
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Implementing CECL at Small and Community Banks
Michael L Gullette
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
At their very core, the individual challenges of implementing CECL at a smaller institution have little difference from the challenges facing larger institutions. The current processes to estimate the allowance for loan and lease losses (ALLL) at most banks – large and small – are not nearly as different as one may think. Forty years of incurred-loss accounting have largely reduced the estimate of the ALLL to a quarterly exercise that has little, if any, linkage to credit-risk management. Beset by the cyclical regulatory worries over “earnings management” and “too little, too late” reserves, the current accounting process in the US is more mechanical than analytical, focused more on individual impairment than on portfolio threats, and reliant on recent historical experience rather than a portfolio’s credit-risk characteristics. Of course, current incurred-loss accounting specifically forbids forecasts of future conditions, and that is probably the most important aspect of CECL!
Measurement of overall credit risk in a portfolio – the heart of CECL – is something never formally performed by the vast majority of banks, large or small. While the largest banks may have experience in
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