CECL and the Credit Cycle

Abstract

We find that that the Current Expected Credit Loss (CECL) standard would slightly
dampen fluctuations in bank lending over the economic cycle. In particular, if the CECL
standard had always been in place, we estimate that lending would have grown more slowly
leading up to the financial crisis and more rapidly afterwards. We arrive at this conclusion by
estimating historical allowances under CECL and modeling how the impact on accounting
variables would have affected banks’ lending and capital distributions. We consider a variety of
approaches to address uncertainty regarding the management of bank capital and predictability of credit losses.

Keywords: Current expected credit loss, Allowance for Loan and Lease Losses, Accounting

JEL Classification: E1, E3, G21, G28, M41, M48