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DBRS Morningstar expects CECL not to impact US bank ratings

DBRS Morningstar said implementing the current expected credit loss standard is unlikely to affect U.S. bank credit ratings.

CECL requires institutions to reserve for the expected lifetime losses of a loan on the day it is originated. That differs from the existing method, which records losses when they become probable.

CECL will result in a reduction in bank capital, but a corresponding increase in reserves will make it a credit-neutral change, as a bank's total loss-absorbing capacity and underlying credit risk will be unchanged, the rating agency wrote.

The new standard is going into effect in a benign credit environment, and its behavior is uncertain for more challenging credit environments, DBRS Morningstar wrote. The new standard could make bank earnings more volatile and make comparing reserve levels across banks more difficult as economic models and forecasts vary.

Capital returns to shareholders could shrink as banks build capital levels back up post-implementation, it added.