The Potential Impact of CECL Effect on the Banking Industry: Using Portfolio Duration Estimation

Abstract

This paper examines all of the banks that submitted sufficient Call Report data to the FDIC for the quarters ended September 30, 2015 through December 31, 2018. We compared the current December 31, 2018, loan loss reserve percentage to calculated actual write-off experience, as described below, over the 42-month period ending on December 31, 2018 (the Recovery Period) and the 42-month period ending on December 31, 2011 (the Great Recession Period). The 42-month period was selected based on an average maturity calculation from amounts reported on the December 31, 2018, Call Report.

For each selected bank, we totaled the bad debt write-offs (net of recoveries) from the call reports submitted to the FDIC for the quarters ended September 30, 2015 through December 31, 2018 and divided the result by the average gross loans and leases balance over that same period. We performed the same procedures for the quarters ended September 30, 2008 through December 31, 2011 (Post Recession).

For each period, we then broke the data down by size decile based on December 31, 2018 total asset balances.

We found that, for the Recovery period, at all size deciles, the median current bad debt reserve balance exceeds the calculated 2015 to 2018 net write-off bad debt experience. However, compared to the Post Recession period (from September 30, 2008 to December 31, 2011) the banking system appears under-reserved by from 50% (for the smallest banks) to 500% (for the largest banks).

Portfolio duration will impact the calculation of expected reserves. However, given the shorter portfolio duration in banking relative to a full economic cycle, the expected reserve may be insufficient if the full economic cycle is not considered.

Keywords: Banks, Studies, Capital Ratio, Efficiency Ratio, Asset Size

JEL Classification: G21