The Impact of the Current Expected Credit Loss Standard (Cecl) on the Timing and Comparability of Reserves

28 Pages Posted: 7 Jun 2018 Last revised: 29 Apr 2020

See all articles by Sarah Chae

Sarah Chae

Board of Governors of the Federal Reserve System

Robert Sarama

Board of Governors of the Federal Reserve System

Cindy M. Vojtech

Board of Governors of the Federal Reserve System

James Wang

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-03-09

Abstract

The new forward-looking credit loss provisioning standard, CECL, is intended to promote proactive provisioning as loan loss reserves can be conditioned on expectations of the economic cycle. We study the degree to which one modeling decision–expectations about the path of future house prices – affects the size and timing of provisions for first-lien residential mortgage portfolios. While we find that provisions are generally less pro-cyclical compared to the current incurred loss standard, CECL may complicate the comparability of provisions across banks and time. Market participants will need to disentangle the degree to which variation in provisions across firms is driven by underlying risk versus differences in modeling assumptions.

Keywords: Accounting rule change, CECL, Mortgage loans, Model risk

JEL Classification: G21, G28, M40, M48

Suggested Citation

Chae, Sarah and Sarama, Robert and Vojtech, Cindy M. and Wang, James, The Impact of the Current Expected Credit Loss Standard (Cecl) on the Timing and Comparability of Reserves (2018-03-09). FEDS Working Paper No. 2018-020, Available at SSRN: https://ssrn.com/abstract=3192150 or http://dx.doi.org/10.17016/FEDS.2018.020

Sarah Chae (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Robert Sarama

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Cindy M. Vojtech

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://https://www.federalreserve.gov/econres/cindy-m-vojtech.htm

James Wang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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