Finance and Economics Discussion Series (FEDS)
March 2018 (Revised June 2019)
The Effect of the Current Expected Credit Loss Standard (CECL) on the Timing and Comparability of Reserves
CECL, the new credit loss provisioning standard, is intended to promote proactive provisioning as loan loss reserves must incorporate forward-looking assumptions. We study how one assumption—expectations about future house prices—affects the size and timing of provisions for residential mortgage portfolios. While provisions under CECL are generally less pro-cyclical compared to the incurred loss standard under various forecasts and measures of pro-cyclicality, 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 idiosyncratic differences in forecasting methods.
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Keywords: CECL, accounting rule change, model risk, mortgage loans
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