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
Date Written: 2018-03-09
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 decisionâ€“expectations about the path of future house prices â€“ 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: Suggested Citation