Traditional Reserves
vs
CECL Reserves
Primary Objective of CECL:
To have a sufficiently precise level of reserves so as not to need replacement provisions at time of loss.
Compare and Contrast
Traditional Reserves
vs
CECL Reserves
Traditional
Specific Reserves plus General Reserves |
CECL
|
Specific Reserves
Traditional
Specific Loss Estimates of Identified Weaknesses Sometimes Anecdotal (Typically based on Loan Classifications) |
CECL
Assessment of "Specific" Potential Risks Specific Loss Estimates of Identified Weaknesses based upon Actual Historical Evidence ~Historic Loss Profiles~ (Expanded Scope of Analysis) |
General Reserves
Traditional
Estimated Loan Cushion Typically Anecdotal Only (Often based upon industry estimates or standards) |
CECL
Assessment of "Currently" Identifiable Risks Must be based on Actual Historical Evidence Must be Computed for each "Individual" Risk Asset. Historical Annual Loss Experience X Average “Principal at Risk” for 1st Year (partial) Plus Historic Annual Loss Experience X Average “Principal at Risk” for “Each” Successive Year (or part of a year) |
Reserves for Future Risks
Traditional
No Equivalent in Current System (Perhaps Qualitative Factors) |
CECL
Assessment of Reasonably Identifiable and Potentially Probable “Future” Risks Equals Reserve for “Currently” Identifiable Risks X The “Future Economic Risk Coefficient” |