Lecture 15 - Loan Loss accounting

Question 1

What was the old accounting model used before CECL

Answer 1

the allowance for loan and lease losses

Question 2

What does CECL stand for

Answer 2

Current Expected Credit Loss

Question 3

How does CECL effect net income

Answer 3

Increases Net Income Upfront - Incresing banks reserves early

Question 4

What are key pros of CECL

Answer 4

-Tries to anticipate issues by including both historical loan performance data and forcasted expectations for future loss ,
-Allows for increased fleibility for banks to interpret data
-Greater transparency on banks thoughts on expectation
-increasign banks reserves early in a downsycle could lead to srtonger system

Question 5

What are the cons of CECL

Answer 5

• There is a timing mismatch ( expected losses are accounted for at the beginning of the loan whereas loan revenue from repayment occurs throughout the life of the loan)
  -Earning volatility
  -Inconsistent standard because cecl is principal based vs ALLL which is rule based
  -Increasing reserves early in a cycle could lead to capital constraints

Question 6

How was JP morgans net income effected when they implemented CECL in 2016

Answer 6

Net income fell by 20% in the first year then increased by 65% the following