Implementing CECL at Small and Community Banks

Michael L Gullette

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