CECL (current expected credit loss)
Also known as: CECL · ASC 326 · Expected credit loss · Allowance for credit losses · ASU 2016-13
The US GAAP accounting standard (ASC 326) that requires lenders to reserve, from the day a loan is booked, for the credit losses expected over its entire life.
Legal basis
Federal Reserve, FAQs on the new accounting standard on credit losses (CECL)
Before CECL, banks reserved under an incurred loss model: a loss was recognized only once it was probable, which delayed provisions until trouble was already visible. FASB's ASU 2016-13 replaced it with lifetime expected credit losses, measured at origination from historical experience, current conditions and reasonable and supportable forecasts.
SEC filers other than smaller reporting companies adopted it first; for everyone else, it applies to fiscal years beginning after December 15, 2022. The result is that every new loan carries a day-one reserve, and changes in expected losses flow through earnings as they are re-estimated.
CECL rewards better information. A model that separates good and bad risks at origination, and detects deterioration early during the loan's life, produces reserves that are both lower and more accurate than one that assigns the portfolio average to everyone. Behavioral and collateral signals feed exactly those two moments.
Frequently asked questions
What is the difference between CECL and the incurred loss model?
Under the incurred loss model, credit losses were recognized only when probable and incurred. CECL requires estimating and reserving for expected losses over the full life of the loan from the moment it is originated.