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Regulators keeping CECL out of big-bank stress tests for now

The Federal Reserve Board will not change its existing framework for modeling loan allowances in the big-bank stress tests it conducts through 2021.

The 2019, 2020 and 2021 cycles of stress tests known as the Comprehensive Capital Analysis and Review, or CCAR, will not be modified to reflect a new loan loss accounting method that will soon go into effect for the banking industry. This new approach, called the current expected credit loss model, or CECL, will require banks to recognize lifetime losses on loans at origination, rather than when they become probable.

Big banks also run their own stress tests as part of CCAR. They must incorporate CECL into those tests beginning in the 2020 cycle. But the Fed will not issue supervisory findings on those banks' allowance estimations through 2021, and it will monitor how the new standard impacts projected allowances and capital, according to a Dec. 21 news release.

Broadly, the Fed will monitor the impact of CECL adoption and evaluate future enhancements to the CCAR framework as best practices for implementing the new accounting method are developed.