PROBABILITY OF DEFAULT – POOL VS CREDIT SCORE
PROBABILITY OF DEFAULT (PD) UNDER CECL Most financial institutions, such as banks and credit unions, regard the Probability of Default/Loss Given Default (PD/LGD) technique as a reliable method for determining suitable reserve levels in an institution’s loan and lease loss allowance. The PD/LGD method has quickly become the preferred one in the Financial Accounting Standards […]
Q-FACTORS – THE SECRET SAUCE FOR EVERY US INSTITUTION
Q FACTORS UNDER CECL Most financial institutions in the U.S. were left wondering about the fate of their qualitative factors, also known as Q factors, under the Current Expected Credit Losses (CECL) standard when it was issued by the Financial Accounting Standards Board (FASB) in 2016. Bankers, faced with a 2023 CECL implementation date, wonder […]
DATA AND ISSUES AROUND CREATING A SMOOTH, AUDITABLE PROCESS IN THE FUTURE
AUDITING CECL RESERVE CALCULATIONS The Financial Accounting Standards Board’s (FASB) new standard, the Current Expected Credit Loss (CECL) continues to be a challenge for independent auditors, financial statement preparers, and users. The metrics that companies traditionally used to estimate their future credit losses have undergone a paradigm shift with CECL. The previous method of loan […]
CECL DATA SOURCES OVERVIEW FOR SMALL BANKS – FFIEC, FRED, AND FED
CECL STANDARD AND THE BANKING INDUSTRY Small community banks have until 2023 to implement Current Expected Credit Losses (CECL) accounting standards after the Financial Accounting Standards Board (FASB) decided to delay CECL implementation for private and small public companies in 2019. CECL implementation began for large Security and Exchange Commission (SEC) filers in January 2020. […]
PREPARING FOR THE CECL AUDIT – DATA TRANSPARENCY
CECL UPDATES GUIDANCE ON THE MEASUREMENT OF CREDIT LOSSES The Financial Accounting Standards Board (FASB) released a new accounting standard, the Current Expected Credit Losses (CECL) model in June 2016, updating the guidance on the measurement of credit losses for financial assets. The FASB has allowed a staggered adoption date for big and small Public […]
CECL IMPLEMENTATION CHECKLIST FOR SUCCESS
CECL IMPLEMENTATION DURING THE PANDEMIC The Financial Accounting Standards Board’s (FASB) accounting standard, Current Expected Credit Losses (CECL), is one of the more challenging accounting change projects that financial institutions, such as banks, may have witnessed in the past decade. Recent events such as the COVID-19 pandemic have added another layer of challenge to an […]
AN IN-DEPTH EXAMINATION OF THE PROBABILITY-OFDEFAULT/ LOSS GIVEN DEFAULT METHOD
OVERVIEW OF THE PROBABILITY- OF-DEFAULT/ LOSS GIVEN DEFAULT METHOD The Financial Accounting Standards Board (FASB) is flexible when it comes to choosing the applicable methodology for implementing the Current Expected Credit Losses (CECL) standard. It can be a challenge for financial institutions to choose the right method to determine their allowances for credit losses as some of these seem overly simple and some are too complex. The Probability-of-default/ Loss Given Default (PD/LGD) method is one of the simpler methods […]
DEEP DIVE INTO WARM AND DISCOUNTED CASHFLOW METHODS
CECL THROUGH WEIGHTED- AVERAGE REMAINING MATURITY METHOD AND DISCOUNTED CASH FLOW ANALYSIS The Current Expected Credit Losses (CECL) standard was issued by the Financial Accounting Standards Board (FASB) on June 16, 2016. The CECL methodology replaced the longstanding Allowance for Loan and Lease Losses (ALLL) accounting standard for computing allowances for credit losses on a […]
A DEEP DIVE ON VINTAGE AND ROLL-RATE METHODS
ESTIMATING CECL USING VINTAGE AND ROLL-RATE METHODS Post the 2007-2008 financial crisis, the Allowance for Loan and Lease Losses (ALLL) method proved inadequate for the adjustment of reserve levels of financial institutions. It caused a massive wave of credit losses for banks. To rectify this situation, on June 16, 2016, the Financial Accounting Standards Board […]
AN OVERVIEW OF THE 5 MAIN MODELS THAT ARE RECOMMENDED FOR CECL
THE CECL METHODOLOGIES The Current Expected Credit Losses (CECL) methodology for estimating allowances for credit losses came into existence on June 16, 2016, and was issued by the Financial Accounting Standards Board (FASB). CECL replaced the Allowance for Loan and Lease Losses (ALLL) accounting standard. ALLL relied on losses that were incurred but did not […]
