Skip to content

The CECL Model: Accounting Changes Coming for Banks

Monday, August 26, 2019

By Julie Stackhouse, Executive Vice President

This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, appears at least once each month.

We are more than a decade removed from the financial crisis—a time when many factors converged to threaten the viability of our financial system. Since then, numerous reforms have been implemented. Today, our banking system is substantially stronger and more resilient. For an overview, see “Did the Dodd-Frank Act Make the Financial System Safer?

Financial regulators have introduced many of those reforms. But other groups have acted as well, including the accounting community through the Financial Accounting Standards Board (FASB). The FASB has recognized the need for change in how firms account for losses in assets held at amortized cost on the balance sheet. The result is a new accounting standard: the current expected credit loss (CECL) model.

What Went Wrong

At the time of the financial crisis (and even today), accounting standards called for losses on many assets to be recognized when it became “probable” that the loss would occur. The accounting community called this method the “incurred loss” model. Importantly, this model relied heavily on historical trends and performance to predict potential asset losses.

If financial and economic conditions are good and do not change, this model works adequately. Unfortunately, going into the financial crisis, this was not the case. Reserves for asset losses—in particular, assets in the loan portfolio—were too low relative to the quality of loans being extended and the probability that economic conditions could change.

As the financial crisis unfolded, loans on the balance sheets of many banks performed so poorly that investors and analysts began questioning the accuracy of balance sheets—balance sheets that had been prepared in accordance with Generally Accepted Accounting Principles (GAAP). Moreover, inadequate reserves for losses meant massive charges to earnings in a short period of time to reflect the pending losses in loans. This left many banks with inadequate capital to sustain normal operations. The U.S. faced emergency mergers, government intervention and more than 500 bank failures.


The FASB set out to address those weaknesses by introducing a more flexible accounting standard: CECL. Importantly, CECL calls for measuring expected losses over the life of an asset, not just when the loss becomes probable. Those expected losses are recognized the day the asset is booked.

Institutions will rely on historical experience, current conditions and “reasonable and supportable forecasts” in their assessment.For additional information, see “FASB Issues New Guidance on Accounting for Credit Losses,” FASB news release, June 16, 2016. In other words, they will now use forward-looking information to better inform their credit loss estimates.

Finally—and significantly for many firms—CECL can be implemented in a way appropriate to the size and complexity of the firm.

What’s Next?

The FASB issued the accounting standard in 2016 with a delayed start date to allow companies time to adjust. Larger public firms will implement the standard in 2020, with smaller firms switching over at a later date.

Despite the extended rollout, implementation has proven difficult for some banking organizations because of data and personnel limitations. Next month, I’ll describe some of those challenges and the steps being taken by regulators to promote a smooth transition.

Notes and References

1 For an overview, see “Did the Dodd-Frank Act Make the Financial System Safer?

2 For additional information, see “FASB Issues New Guidance on Accounting for Credit Losses,” FASB news release, June 16, 2016.

Additional Resources

Posted In Banking  |  Tagged julie stackhousebankingceclcurrent expected credit lossaccountingassets
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.