--- title: "Current Expected Credit Losses: definition, formula, and thresholds" description: "CECL, the current expected credit losses standard (FASB ASC Topic 326), is the US accounting rule that requires a bank to reserve, from the day it makes or buys a loan, for all the credit losses it expects over that loan's whole life. It replaced the incurred-loss model, under which a bank reserved only for losses that were probable and had already been incurred." canonical_url: https://www.bankregreports.com/glossary/cecl/ source: BankRegReports category: "Asset Quality" units: "%" schedule: "Schedule RC, RI, RI-B, RC-G" --- # Current Expected Credit Losses > CECL, the current expected credit losses standard (FASB ASC Topic 326), is the US accounting rule that requires a bank to reserve, from the day it makes or buys a loan, for all the credit losses it expects over that loan's whole life. It replaced the incurred-loss model, under which a bank reserved only for losses that were probable and had already been incurred. ## Formula ``` Allowance for credit losses = expected lifetime credit losses on loans, held-to-maturity securities and off-balance-sheet credit exposures ``` CECL does not prescribe one method. A bank pools loans with similar risk and estimates lifetime losses for each pool with a method it can support: loss rates from its own history (vintage or cohort analysis), discounted cash flows, probability of default times loss given default, or remaining-life averages. The estimate starts from the bank's loss history, is adjusted for current conditions, and adds a reasonable and supportable forecast of the economy; past the forecast horizon it reverts to historical loss rates. Qualitative adjustments cover what the model cannot see, such as a change in underwriting or a local concentration. ## Why it matters CECL changed when losses hit earnings. Under the incurred-loss model a bank booked most of its reserve only after borrowers showed trouble, so reserves rose late in a downturn. Under CECL the full lifetime estimate is booked when a loan is made, and every change in the economic forecast runs through the provision at once, so reserves rise earlier and earnings move with the outlook. At adoption, banks booked the day-one increase in the allowance as a charge to retained earnings, not through the provision, and the banking agencies let them phase that capital effect in over three years (five years for banks that adopted in 2020 and took the pandemic-era option). ## How to read it On the call report the CECL allowance on loans is Schedule RC, item 4.c, allowance for credit losses on loans and leases (RCFD3123), deducted from loans held for investment. Divide it by total loans and leases (Schedule RC-C, item 12, RCFD2122) for allowance to loans. Schedule RI-B, Part II reconciles the allowance each period for loans, held-to-maturity securities and available-for-sale securities: the opening balance, plus the provision, less charge-offs, plus recoveries. The provision itself is Schedule RI, item 4 (RIADJJ33), and the separate allowance for off-balance-sheet credit exposures, such as unfunded commitments, is Schedule RC-G, item 3 (RCFDB557). Compare a bank's allowance with its own charge-off history and loan mix, not with one industry number: card and consumer lenders carry far more than residential mortgage lenders. ## Thresholds | Range | Reading | What it means | |---|---|---| | January 1, 2020 | First adopters | SEC filers other than smaller reporting companies (fiscal years beginning after December 15, 2019). | | January 1, 2023 | Everyone else | Smaller reporting companies, privately held banks and credit unions (fiscal years beginning after December 15, 2022). | ## Worked example A bank holds $100 million of five-year commercial loans. Its history shows about 0.4% of such loans default each year, and it loses roughly half of what defaults. Under the incurred-loss model it might reserve about one year of probable losses, around $0.2 million, until problems appear. Under CECL it reserves the expected loss over the remaining life, closer to $1 million, adjusted up or down for its economic forecast, and books that amount when the loans are made. ## Questions ### What does CECL stand for? Current expected credit losses. It is the credit loss standard in FASB Accounting Standards Codification Topic 326, created by ASU 2016-13 in June 2016. ### What did CECL replace? The incurred-loss model, under which the allowance for loan and lease losses (ALLL) covered only losses that were probable and already incurred. CECL's allowance for credit losses covers expected losses over each loan's whole life. ### When did banks have to adopt CECL? SEC filers other than smaller reporting companies adopted it for fiscal years beginning after December 15, 2019, so January 1, 2020 for a calendar-year bank. All other banks and credit unions adopted it for fiscal years beginning after December 15, 2022, so January 1, 2023. ### Where is the CECL allowance on the call report? The allowance on loans is Schedule RC, item 4.c (RCFD3123). Schedule RI-B, Part II shows how it changed during the period, the provision is Schedule RI, item 4 (RIADJJ33), and the allowance for off-balance-sheet credit exposures is Schedule RC-G, item 3 (RCFDB557). ### Does CECL apply to securities? Held-to-maturity debt securities carry a CECL allowance like loans. Available-for-sale debt securities do not use the lifetime model; they record an allowance only for credit losses when fair value falls below amortized cost. ### Did CECL raise bank reserves? Yes, for most banks. Reserving for lifetime losses instead of incurred losses increased the allowance at adoption, by the most at card and consumer lenders with long-lived or high-loss loans. The day-one increase was charged to retained earnings, not to income. ## Sources - FASB ASC Topic 326, Financial Instruments: Credit Losses (ASU 2016-13) - [FFIEC Call Report Schedule RI-B, Part II (Changes in Allowances for Credit Losses)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF) - [FFIEC Call Report Schedule RC (Balance Sheet), item 4.c](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF) - Interagency Policy Statement on Allowances for Credit Losses (2020) ## Related metrics - [Allowance for Credit Losses](https://www.bankregreports.com/glossary/allowance-credit-losses/): The allowance for credit losses (ACL), called the allowance for loan and lease losses (ALLL) before the CECL standard, is the reserve a bank holds against losses it expects on its loans. It is deducted from gross loans on the balance sheet, and under CECL it covers expected losses over each loan's whole life. - [Allowance for Credit Losses / Loans](https://www.bankregreports.com/glossary/acl-loans/): ACL/Loans measures the bank's reserve for expected credit losses as a percentage of total loans. Under the CECL (Current Expected Credit Loss) standard (effective in 2020 for large SEC filers and on January 1, 2023 for most other institutions), this reserve covers losses expected over the life of each loan, not just incurred losses. - [Provision for Credit Losses](https://www.bankregreports.com/glossary/provision-credit-losses/): The provision for credit losses is the expense a bank records to build or maintain its allowance for credit losses. Under the CECL standard it reflects expected lifetime losses, and it sits between revenue and net income on the income statement. - [Net Charge-Off Ratio](https://www.bankregreports.com/glossary/nco-ratio/): The Net Charge-Off ratio (annualized) measures loans actually written off as uncollectible (less subsequent recoveries) divided by average loans outstanding. It is the realized credit loss experience of the bank. - [Loan Loss Coverage Ratio](https://www.bankregreports.com/glossary/coverage-ratio/): The coverage ratio measures the bank's loan loss reserve against its non-performing loans. It answers: how many times over could the bank's reserves absorb its current problem loans? ## About this document This is the markdown twin of the page named in `canonical_url` above. Source filings are public record; the cleaning, normalization, cross-source linkage, and derived metrics are BankRegReports' own. Attribute with a link to the canonical URL. 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