With delay, CECL will not be countercyclical for most banks
The Financial Accounting Standards Board's new reserve methodology is unlikely to achieve its goal of helping the U.S. banking industry build reserves ahead of the next downturn thanks to the proposed delay in implementation for the vast majority of institutions. After years of debate, FASB created the current expected credit loss model, or CECL, with an eye to speed up the recognition of problems by requiring institutions to reserve for estimated losses at origination as opposed to building allowances when a loss is probable. Many bankers expect CECL to boost reserves at adoption, but we have argued that institutions are unlikely to build allowances enough to prepare for an economic downturn. That almost certainly will be the case for the vast majority of institutions in the U.S. banking industry, since FASB has now proposed delaying their implementation to 2023 — beyond the likely turn in the credit cycle.