Asset Quality
Current Expected Credit Losses
Also known as CECL, Current Expected Credit Loss, CECL Model, ASC 326, ASU 2016-13
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.
How a bank estimates its allowance under CECL
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.
- Group loans and held-to-maturity securities into pools with similar risk, such as loan type, collateral and credit grade.
- Estimate each pool's lifetime loss rate from the bank's own history, using one supportable method (vintage, loss rate, discounted cash flow or probability of default).
- Adjust the rate for current conditions and a reasonable and supportable economic forecast, then revert to historical rates beyond that horizon.
- Apply the rates to each pool's amortized cost and add any individually assessed loans. The total is the allowance; the change from last quarter, plus net charge-offs, is the provision for credit losses.
The CECL allowance at US banks today
Across the US banking system, the allowance for credit losses on loans was 1.61% of total loans in Q2 2026, every filing bank combined (4,297 banks). Source: FFIEC call reports, Schedule RC, item 4.c over total loans and leases. The same ratio for one bank is its allowance to loans.
Bank example: Wells Fargo Bank, N.A. reported an allowance for credit losses on loans of $13.9 billion against $997.8 billion of loans in Q2 2026, 1.39% of loans (RCFD3123 over RCFD2122).
Why does CECL matter?
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 do you interpret CECL?
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.
When did banks adopt CECL?
| Range | Label | Interpretation |
|---|---|---|
| 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
Illustrative figures, not a reported bank.
CECL vs the incurred-loss model
The two models answer different questions. The incurred-loss model asked which losses have already happened; CECL asks which losses the bank expects over each loan's life.
| Measure | Formula | What it shows |
|---|---|---|
| CECL (ASC 326) | Expected lifetime losses, recorded when the loan is made or bought | Losses the bank expects over the full life of loans, held-to-maturity securities and unfunded commitments, using a forecast. |
| Incurred-loss model (ALLL) | Probable losses already incurred, recorded when a loss event occurs | Losses already embedded in the portfolio at the balance sheet date; no forecast of future conditions. |
Frequently asked
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)
- FFIEC Call Report Schedule RC (Balance Sheet), item 4.c
- Interagency Policy Statement on Allowances for Credit Losses (2020)
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