The Impacts of CECL: Empirical Assessments and Implications

Michael Fadil

INTRODUCTION

Much discussion has occurred in the banking industry with regard to the potential impacts of CECL, for which the accounting standard update was finalised in June 2016. The primary analytical focus has been on how a bank should develop the loss-forecasting models and modelling framework to calculate the lifetime expected credit losses. While developing a modelling framework that will be GAAP-compliant is critical to implementing CECL, understanding how CECL reserves will behave is just as important. Despite the importance, impact analyses to try to fully understand how CECL would have actually performed over the past 10–15 years have been limited, and few have articulated how the total bank CECL reserves might have behaved through the last downturn. For example, Breeden (2017) used a “large dataset from Fannie Mae and Freddie Mac to test a range of models and options”, all allowable by the CECL guidelines, and concluded that for 30-year, fixed-rate, conforming mortgages the lifetime loss rates can “vary by a factor of 2”, depending on which loss-forecasting model methodology a bank chooses. Additionally, Pan, Wang and Wu (2017) of Moody’s Analytics used a historical

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