10/12/2018 - A Fundamental Shift in Models Used for Estimating Loan-Loss Reserves
Home > News & Insights > Insights & Publications

10/12/2018 - A Fundamental Shift in Models Used for Estimating Loan-Loss Reserves

The forthcoming U.S. accounting standard for current expected credit losses represents a fundamental change in financial institutions’ approach to estimating required loan-loss reserves and provisions. The Financial Accounting Standards Board created the CECL standard as a forward-looking measure for recognizing potential credit losses, and it amounts to an increase in complexity over the existing loss-incurred method. Regulators will closely scrutinize the risk management of CECL models and expect strong model governance proportionate to the risk and complexity of each model.

A new Sightlines InFocus — “A Fundamental Shift in Models Used for Estimating Loan-Loss Reserves” by Ryan Charest and William Lang — discusses the similarities between modeling approaches used in both CECL and stress testing, as well as the significant differences financial institutions must be alert to when addressing the unique challenges CECL will pose.

Read More...