United States / Analyst Insights
Opportunities & Challenges (Part 2): CECL Impact on US Banking

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by Nick Masters, Lead Industry Analyst
Oct 08 2019

In part two of our Opportunities & Challenges series, IBISWorld discusses the opportunities and challenges industries face in response to changes in regulation, technology, competition and more. In this article, we’ll discuss the industry response to new CECL accounting standards.


The Current Expected Credit Losses (CECL) accounting standard is a new regulation that is expected to present significant challenges to the financial services sector and consumer access to credit. The new standard, which is expected to take effect December 2019, will require banks to account for potential loan losses up front, as opposed to the current method of recording losses based on missed payments or other evidence of potential default. The rule effectively sheds more light on the riskiness of a bank’s loans, enabling potential investors to better evaluate a bank’s financial standing.

The Financial Accounting Standards Board (FASB) approved the standard in 2016 in response to banks recording loan losses too late during the 2008 financial crisis.

However, the standard is currently facing significant pushback by the $775.8-billion Commercial Banking industry (IBISWorld report 52211) and even Congress due to its potentially damaging effect on consumer lending practices and the economy. The FASB has defended the standard, saying that it will encourage safer, more conservative lending practices and will not, as some have assumed, lead to an economic contraction.

CECL: The Pros & Cons

The predominant benefit of CECL is greater transparency into bank lending practices. Specifically, the standard removes the triggers that would cause a bank to post expected credit loss provisions on its books and replaces this “trigger method” with an up-front estimation of credit losses that reflects the total amount expected to be repaid. This up-front estimation incorporates forward-looking analyses into the potential collectability of debt instruments and requires banks to place more capital in reserves to cover such losses. In short, CECL is a more-robust method for estimating potential credit losses.

However, some, particularly affected banks, believe the standard is overkill and may do more harm than good . The banks believe that CECL will materially impact their profitability by reducing the amount of capital available for lending. Banks have also said that CECL will severely limit their ability to lend during a recession, causing further economic contraction. Lastly, small banks, which do not have the advantage of economies of scale, have expressed worry over the burdensome costs associated with implementing the new standard.

CECL’s Delay

The contention surrounding CECL has resulted in a concession by the FASB. In July, the FASB agreed to delay the implementation of CECL for small banks and credit unions. However, the length of the delay varies for different lenders: small public banks have been granted three extra years, while credit unions and private lenders only get one. Large public banks will still be required to comply with the standard for all reporting periods after December 15 , 2019. CECL’s delay will give both small banks and private lenders more time to prepare for implementation as well as the opportunity to learn from the large banks already operating under CECL.

From an industry perspective, the $77.4-billion Credit Unions industry (52213) and the $20.2-billion Agricultural Banks industry (OD4739) are among the primary beneficiaries of this delay given their low market share concentration. Conversely, major commercial banks and large players in the Savings Banks & Thrifts industry (52212) are currently preparing for implementation. Large banks are redesigning and building out internal departments to adopt CECL in an effort to ensure compliance and mitigate its impact on their bottom line.



For related coverage on commercial banks and risk, check out our three-part webinar series, “Flying Blind: Are You Ready for the Next Recession? ” and the accompanying white papers. Additionally, check out part one of our Opportunities & Challenges Industry Insider series on Canada Cannabis Production here. 



Edited by Kieran Newton, Lead Editor
Infographic Design by Sean Egan, Copy Editor & Page Designer