The New Impairment Model Under IFRS 9 and CECL
First published:
ISBN: 978-1-78272-347-9
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Loss Forecasting Retail and Commercial Portfolios for CECL
Cristian deRitis and Douglas W Dwyer
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
The adoption of the CECL (current expected credit loss) accounting standard will have profound implications for credit providers. Banks and other lenders will need to adopt forward-looking methodologies in order to project lifetime loan losses and then add to their loss-allowance provisions based on these projections. This chapter discusses issues associated with implementing CECL on both retail and commercial portfolios. Some issues are specific to retail assets, others specific to commercial assets, while some are common to both.
The most relevant section for modelling credit losses comes from p. 3 of the CECL guidance provided by the Financial Accounting Standards Board (FASB 2016):
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.
Amendments allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop
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