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December 9, 2021

Board of Governors of the Federal Reserve System

Statement on the current expected credit loss methodology (CECL) and stress testing

In 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 

2016-13, which introduced the current expected credit loss methodology or CECL. CECL requires 

firms to recognize lifetime expected credit losses for financial assets measured at amortized cost, 

rather than those credit losses that are probable of having been incurred, in their allowance for 

credit losses as of the financial reporting date. The majority of banking organizations currently

subject to Federal Reserve supervisory stress testing adopted CECL on January 1, 2020, with all 

such organizations scheduled to have adopted CECL by 2023. Under the regulatory capital rule, 

banking organizations have been allowed to phase in the potential adverse impact of CECL on 

regulatory capital over a three- or five-year transition period.

1

Prior to the transition to CECL, the Federal Reserve stated that it intended to maintain its preexisting framework for calculating allowances on credit losses in the supervisory stress test 

through the end of 2021 and, during that time, would evaluate appropriate future enhancements to 

this framework.2 This statement provides additional information on the position that the Federal 

Reserve plans to take on incorporating the CECL accounting standard into its supervisory stress 

test.

The existing supervisory stress test framework generally assumes that the level of the allowance 

on credit losses at the end of a given quarter equals the amount needed to cover projected loan 

losses over the next four quarters. Because this calculation is based on projected losses under the 

severely adverse scenario, it typically differs from a banking organization’s actual allowance on 

credit losses at the beginning of the planning horizon, which is based on information available as 

of the balance sheet date. Reflecting the uncertainty in the timing of when banking organizations 

recognize losses, any difference between the actual allowance and the assumed allowance under 

stress at the beginning of the planning horizon is spread out over the nine quarters of the planning 

horizon to smooth its effect on capital. Despite differences in the horizon over which losses are 

estimated, this approach is conceptually similar to the CECL standard, as both methods are based 

on a forward-looking estimate of losses.

During the transition to CECL, the Federal Reserve and other federal bank regulatory agencies

stated their intention to continue to closely monitor the effect of CECL on bank capital, lending 

practices, and aggregate level of loss absorbency through the economic cycle.3

 In view of this 

effort and the ongoing objectives to reduce uncertainty, allow for better capital planning at affected 

1 See 12 C.F.R., part 217, subpart G. 2 See “Statement on the current expected credit loss methodology (CECL) and stress testing” (December 21, 2018), 

available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20181221b1.pdf. 3 Moreover, the Consolidated Appropriations Act, 2020 (Public Law No: 116-93) directed the U.S. Department of 

the Treasury in consultation with prudential regulators including the Federal Reserve to study the need, if any, for 

changes to regulatory capital requirements necessitated by CECL. This study, available at

https://home.treasury.gov/system/files/216/The-CECL-Accounting-Standard-and-Financial-Institution-RegulatoryCapital-Study-9-15-20.pdf, noted that as of September 15, 2020, “a definitive assessment of the impact of CECL 

was not feasible in light of the state of CECL implementation across financial institutions and current market 

dynamics relating to the COVID-19 global pandemic.”
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firms, and gather relevant information on the impact of CECL, the Federal Reserve is extending

the period of time over which it will maintain the current framework for allowance for credit losses 

in the supervisory stress test through the 2023 stress testing cycle while continuing to evaluate 

appropriate future enhancements. As previously noted, the Federal Reserve expects that the current 

framework, by taking into account a banking organization’s allowances at the beginning of the 

planning horizon, will continue to largely offset the impact in the supervisory stress test of CECL 

on the allowance at the beginning of the planning horizon.