The New Impairment Model Under IFRS 9 and CECL
First published:
ISBN: 978-1-78272-347-9
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From Incurred Loss to CECL: Historical Perspectives and Practical Guidance
Michel Araten
Introduction
The New Era of Expected Credit Loss Provisioning
The Marking of CECL Standard: Comments and Reflections
Sources of Modelling Variation in CECL Allowances
A CRO’s Perspective: Implementing, Operationalising and Governing of IFRS 9
Implementing Both IFRS 9 and CECL
Macroeconomic Forecasting and Scenario Design for IFRS 9 and CECL
Technology Solutions for CECL and IFRS 9
Implementing IFRS 9: Quantifying Expected Credit Losses in Retail and Wholesale Portfolios
From Incurred Loss to CECL: Historical Perspectives and Practical Guidance
Loss Forecasting Retail and Commercial Portfolios for CECL
Implementing CECL at Small and Community Banks
The New Impairment Model: Audit and Disclosure Challenges
The New Impairment Model: Governance and Validation
The Impacts of CECL: Empirical Assessments and Implications
How the New Impairment Model Could Affect Banks’ Business Models
Measuring and Managing the Impact of New Impairment Models on Dynamics in Allowance, Earnings and Bank Capital
Integration into Regulatory Capital Frameworks
Implications for Equity and Debt Investors
INTRODUCTION
In this chapter we will review how banks have historically set the allowance for loan and lease losses (ALLL) under the incurred loss approach (ILA) and how they are transitioning to the new current expected credit loss (CECL) model. We will begin by providing some background as to how accounting for reserves has evolved under accounting and regulatory concerns. We will then focus on the portion of reserves that deals with loans that have not yet defaulted and review the manner in which one major institution has developed the estimates for its key components. The importance and impact of the proper determination of reserves will be illustrated using two historical case studies experienced at one major financial institution. We will further explore how banks have regarded the ALLL as a key tool for stabilising and managing earnings. Finally, we will describe how banks are viewing the new CECL requirements and provide some guidance for fulfilling the requirements.
BACKGROUND
The recognition that credit assets on a bank’s balance sheet should not be carried at their full value, since losses may have been incurred but not yet realised, is a concept with a long
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