CECL muddies stress tests for US banks

Accounting forecasts differ from Fed’s CCAR scenarios; banks seek middle way to avoid upfront capital hit

Sometimes perfect foresight is not a desirable quality. For US banks updating their annual stress tests to include new accounting practices, many are relying on so-called “imperfect foresight” to gauge credit losses.

Starting from this year, US banks must incorporate Current Expected Credit Loss accounting estimates into their stress test outputs. But the economic scenarios that banks use to determine lifetime credit losses under CECL are different from those used by the Federal Reserve in its