On June 16, the Financial Accounting Standards Board (FASB) issued its new and long-expected loan loss accounting framework, also known as the current expected credit loss model (CECL). Bank regulators have described CECL as the “biggest change to bank accounting ever,” a sentiment which has been echoed by accountants, bank securities lawyers and industry trade groups.

According to the American Bankers Association (ABA), “CECL effectively requires bankers to record, at the time of origination, credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities. This is in contrast to today’s ‘incurred loss’ accounting, under which losses are recorded when it is probable that a loss event has occurred.” The new standard “is expected to increase the allowance for loan and leases losses throughout the industry,” and “will require significant operational changes at all banks, including collecting and analyzing the type of data that supports the modeling of the life-of-loan loss expectation, as well as forecasting and quantifying losses in the future.”

CECL will be effective in 2020 for Securities and Exchange Commission (SEC) registrants  (i.e., holding companies and banks with a class of securities registered with the SEC) and 2021 for all others. The ABA’s brief introductory video is available here. The ABA also has provided other educational resources, available here. Bankers are urged to become familiar with CECL before it goes into effect.