Current Expected Credit Loss Model (CECL) Based on Firm Loan Loss Elasticity

34 Pages Posted: 25 Jun 2019 Last revised: 20 Jul 2021

See all articles by Zane L. Swanson

Zane L. Swanson

University of Central Oklahoma

Richard Green

Texas A&M University--San Antonio

Aminat Aloba

University of Central Oklahoma

Date Written: July 12, 2021

Abstract

Many banks are confronted with the problem of meeting the Financial Accounting Standards Board (FASB) standard which requires the estimation of a Current Expected Credit Loss (ASC 326) which replaces the older well-established Allowance for Loan and Lease Losses. The new standard requires that management and preparers must make a forward-looking disclosure of expected loss based on characteristics of the loan portfolio. Moreover, the standard requires that the methodology be well supported for a specific institution and situation. The current analysis develops an explanatory variable for estimating credit loss based on an economic elasticity concept which has advantages of comparability and the facility of being enhanced by macro-economic and sector control variables. Comparability, simplicity and flexibility would be particularly useful to smaller institutions that lack the experience, modeling expertise, and the ability to afford complex applications.

Keywords: CECL standard, Estimated losses, Financial institutions, Economic elasticity, Audit analysis

JEL Classification: M41, G21

Suggested Citation

Swanson, Zane L. and Green, Richard and Aloba, Aminat, Current Expected Credit Loss Model (CECL) Based on Firm Loan Loss Elasticity (July 12, 2021). Available at SSRN: https://ssrn.com/abstract=3407948 or http://dx.doi.org/10.2139/ssrn.3407948

Zane L. Swanson (Contact Author)

University of Central Oklahoma ( email )

100 North University Drive
Edmond, OK 73034
United States

Richard Green

Texas A&M University--San Antonio ( email )

One University Way
SAN ANTONIO, TX TX 78224
United States
2107842325 (Phone)
78224 (Fax)

HOME PAGE: http://www.tamusa.edu

Aminat Aloba

University of Central Oklahoma ( email )

100 North University Drive
Edmond, OK 73034
United States

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