The switch in accounting rules to a current expected credit loss (CECL) framework is intended to increase stability in the financial system and improve liquidity throughout the economic cycle.
However, as with most changes in rules and regulations, transitioning from the current system to this new approach may inject some volatility into bank earnings and profitability. CECL also introduces uncertainty into accounting calculations, as economic forecasts are imperfect over long horizons.
This white paper considers the adoption of CECL with an eye toward assessing its potential benefits – and risks – to the financial system and the broader economy. The paper will further provide suggestions on how the transition to CECL can be managed smoothly for minimal economic impact.