The Financial Accounting Standards Board (FASB) recently proposed a new model for accounting for credit losses that, if adopted, could force banks to boost their loan loss reserves and recognize losses from loans more quickly.
U.S. banks and financial institutions may have to increase their loan loss reserves by as much as 50 percent from their level today if parts of the proposal are adopted, FASB Chairman Leslie Seidman told the WSJ. If you have not read the 158 page long proposal, watch this short video to know the five most important takeaways.
1. CECL model (Current Expected Credit Loss model) – Bankers and industry leaders have dubbed this proposal the “CECL” model.
2. Divergence – The CECL model is a divergence from the three bucket approach previously proposed by both FASB and IASB. The IASB will be going forward with a modified three bucket approach, which is scheduled to be released around mid-March. At the end of the re-deliberation period, both parties will discuss and possibly decide on re-merging into one, working model. But currently there is a divergence.
3. No incurred loss model – The biggest critique about the current allowance for loan and lease losses calculation was that current calculations aren’t timely enough, that they were backward looking and only took a loss into consideration once it passed a “probable” threshold. The current CECL model recommends forward looking expectations of the loan as well as current and historical losses.
4. Banking professionals expect the new model will increase the ALLL reserve by 10-50 percent.
5. Make sure to read the entire proposal, and review this material not only with peer bankers but also with auditors and examiners. Submit your comments to FASB before May 31.
For more in-depth information, please review our latest whitepaper on recent changes in the FASB proposal and you can also access the recording of our webinar: FASB’s CECL Model: How it will impact your ALLL.