U.S. DEPARTMENT OF THE TREASURY

The Current Expected Credit Loss 

Accounting Standard and 

Financial Institution Regulatory Capital

September 15, 2020
Table of Contents

Executive Summary .................................................................................................................. 3

I. Background ....................................................................................................................... 6

II. CECL’s Implications for Financial Institution Regulatory Capital .......................... 14

III. Key Areas of Debate ....................................................................................................... 21

IV. Recommendations........................................................................................................... 25
3

Executive Summary
4

Executive Summary

The current expected credit loss (CECL) methodology is a new accounting standard for 

estimating allowances for credit losses. CECL currently applies—or will apply—to all entities 

whose financial statements conform to Generally Accepted Accounting Principles in the United 

States (GAAP), including all banks, credit unions, savings associations, and their holding 

companies (collectively, “financial institutions”) that file regulatory reports that conform to 

GAAP. CECL requires financial institutions and other covered entities to recognize lifetime 

expected credit losses for a wide range of financial assets based not only on past events and 

current conditions, but also on reasonable and supportable forecasts. 

Over the years, stakeholders have discussed and debated the potential effects that CECL may 

have on financial institutions and their regulatory capital and lending practices. These issues 

have included whether (1) CECL may have procyclical effects and reduce financial institutions’ 

capacity to lend, particularly in economic downturns; (2) CECL’s anticipated benefits justify its 

implementation costs and other burdens; (3) financial institution capital frameworks should be 

recalibrated in response to CECL; and (4) CECL may have disparate effects on certain types of 

lenders and lending. 

The Consolidated Appropriations Act, 2020 directed the U.S. Department of the Treasury

(Treasury), in consultation with the Board of Governors of the Federal Reserve System (Federal 

Reserve), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of 

the Currency (OCC), and the National Credit Union Administration (NCUA) (collectively, the 

“prudential regulators”), to study the need, if any, for changes to regulatory capital requirements 

necessitated by CECL.1

Treasury has monitored the planning for the transition to CECL, including CECL’s potential 

effects on regulatory capital and financial institutions’ lending practices. Treasury has consulted 

with a wide range of stakeholders on this topic, including representatives from financial 

institutions and trade groups, representatives of the Financial Accounting Standards Board 

(FASB), staff of the U.S. Congress, staff of the prudential regulators, and staff of the U.S. 

Securities and Exchange Commission (SEC). 

Treasury supports the goals of CECL—including to provide users of financial statements with 

more forward-looking information and to present assets on financial statements in a manner that 

reflects amounts expected to be collected. Treasury also recognizes the seriousness of the 

 

1 S. REP. NO. 116-111, at 11 (2019), https://www.congress.gov/116/crpt/srpt111/CRPT-116srpt111.pdf; 

Consolidated Appropriations Act, 2020, H.R. 1158, Pub. L. No. 116-93 [Legislative Text & Explanatory Statement], 

116th Cong. (2020), https://www.govinfo.gov/content/pkg/CPRT-116HPRT38678/html/CPRT116HPRT38678.htm.
5

concerns that have been raised regarding CECL’s potential effects on and implications for 

regulatory capital, lenders, borrowers, and the U.S. economy. 

A definitive assessment of the impact of CECL on regulatory capital is not currently feasible, in 

light of the state of CECL implementation across financial institutions and current market 

dynamics. Drawing conclusions right now regarding CECL’s impact since its initial 

implementation in early 2020 is challenging because CECL has not been fully implemented by 

all entities, and numerous market factors relating to the COVID-19 global pandemic (including 

government responses) have affected the economy, financial institutions, and borrowing and 

lending dynamics. While some information has emerged indicating that credit availability 

declined and lending standards tightened in some financial product categories in early 2020, 

identifying a definitive linkage between any such trends and the introduction of CECL is difficult

due to various factors related to the COVID-19 global pandemic. 

Treasury will continue to actively monitor CECL implementation and consult with relevant 

stakeholders, including the prudential regulators, FASB, and the SEC. As described in more 

detail below, Treasury makes the following recommendations at this time: 

1. The prudential regulators should continue to monitor the effects of CECL on regulatory 

capital and financial institution lending practices, and calibrate capital requirements, as 

necessary. 

2. The prudential regulators should monitor the use and impact of transitional relief granted, 

and extend or amend the relief, as necessary. 

3. FASB should further study CECL’s anticipated benefits. 

4. FASB should expand its efforts to consult and coordinate with the prudential regulators 

to understand—and take into account when considering any potential amendments to 

CECL—the regulatory effects of CECL on financial institutions. 

5. FASB should, in consultation with relevant stakeholders, explore the costs and benefits of 

further aligning the timing of the accounting recognition of fee revenues associated with 

financial assets under GAAP with the earlier accounting recognition of potential credit 

losses under CECL. 

6. FASB, together with the prudential regulators, should examine the application of CECL 

to smaller lenders. 
6

I. Background
7

I. Background

A. Overview 

The Consolidated Appropriations Act, 2020, directed Treasury, in consultation with the 

prudential regulators, to “conduct a study on the need, if any, for changes to regulatory capital 

requirements necessitated by CECL.”

2

CECL is a new accounting standard for estimating allowances for credit losses. As explained 

below, CECL requires covered entities to recognize lifetime expected credit losses for a wide 

range of financial assets and to incorporate reasonable and supportable forecasts in developing 

their estimates of expected credit losses, while also maintaining the existing accounting 

requirement to consider past events and current information. CECL currently applies—or will 

apply—to all financial institutions that file regulatory reports that conform to GAAP, regardless 

of the size of the financial institution.3

This discussion is organized as follows. Part I provides background information about CECL, 

including how it differs from the prior standard, and when it becomes effective for different 

types of financial institutions. Part II examines CECL’s implications for financial institutions’ 

regulatory capital. Part III discusses many of the key concerns and questions that stakeholders 

have raised regarding CECL’s potential impacts on regulatory capital and lending activity. 

Finally, Part IV provides Treasury’s recommendations.

B. CECL’s Predecessor: The Incurred Loss Methodology

To understand CECL and its potential effects on financial institutions’ regulatory capital, it is 

important to understand the previous standard, the incurred loss methodology (ILM), and the 

decision by FASB, which is the U.S. accounting standard-setting body,4to transition from ILM 

to CECL. 

 

2 S. REP. NO. 116-111, at 11 (2019); Consolidated Appropriations Act, 2020, H.R. 1158, Pub. L. No. 116-93 

[Legislative Text & Explanatory Statement], 116th Cong. (2020).

3 See FEDERAL RESERVE, FDIC, NCUA & OCC, FREQUENTLY ASKED QUESTIONS ON THE NEW ACCOUNTING 

STANDARD ON FINANCIAL INSTRUMENTS – CREDIT LOSSES (2019), https://www.ncua.gov/files/letters-creditunions/financial-instruments-credit-losses-faqs.pdf (“Prudential Regulators’ FAQs”).

4 FASB is a private-sector, not-for-profit organization. The SEC has recognized FASB as the designated accounting 

standard-setter for public companies for more than 45 years. FASB—which is not a regulator—establishes financial 

accounting and reporting standards for public and private companies and not-for-profit organizations that follow 

GAAP. See generally Commission Statement of Policy Reaffirming the Status of the FASB as a Designated 

Private-Sector Standard Setter, 68 Fed. Reg. 23333 (May 1, 2003), https://www.govinfo.gov/content/pkg/FR-2003-

05-01/pdf/03-10716.pdf (discussing the role of, and SEC oversight over, FASB); FASB, About the FASB, 

https://www.fasb.org/facts/ (last updated July 1, 2020) (explaining FASB’s history, structure, and mission).
8

For the 45 years prior to 2020, ILM was the standard for determining allowances for loan and 

lease losses (ALLL) under GAAP. Under ILM, a firm recognizes credit losses only when, based 

on information available upon preparing the financial statement, (1) it is “probable” that a loss 

will have been incurred at the date of the statement, and (2) the firm can reasonably estimate the 

amount of the loss.5 In judging whether a loss is probable under ILM, a firm can use current and 

past information, but cannot consider potential future events that might cause a loss.

ILM was the subject of criticism over the years, including from preparers and users of financial 

statements, financial institutions, and other stakeholders.6 The main concern was that 

determining the impairment of financial assets based on a “probable” threshold and an 

“incurred” notion delayed the recognition of credit losses on loans—and resulted in loan loss 

allowances that were “too little, too late.”7 In the minds of many market participants and other 

stakeholders, the 2008 financial crisis highlighted these perceived shortfalls. As FASB has 

explained:

In the lead-up to the financial crisis, financial statement users were making 

estimates of expected credit losses using forward-looking information and 

devaluing financial institutions before accounting losses were recognized. 

This highlighted that the information needs of users differ from what GAAP 

has required.

Similarly, preparers expressed frustration during this period because they 

could not record credit losses that they were expecting due to the fact that the 

probable threshold had not been met.8

A related shortcoming of ILM, according to some, is the potential information asymmetry that it 

creates. Under ILM, the relevant thresholds delay credit loss recognition until the credit losses 

are probable. The delayed recognition, some have argued, creates information asymmetry 

between financial statement users’ knowledge concerning a firm’s allowance for losses and the 

 

5 See Hal Schroeder, For The Investor: Benefits of the “CECL” Model and “Vintage” Disclosures, FASB 

OUTLOOK (Q2 2015), https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176165963082. 

6 See, e.g., FASB, Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326), 

FASB IN FOCUS (June 16, 2016), 

https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176168232790&d=&pagename=FASB%2FDocume

nt_C%2FDocumentPage (reporting that financial statement users and preparers expressed frustration with ILM 

around the time of the 2008 financial crisis); John C. Dugan, Comptroller of the Currency, OCC, Remarks Before 

the Institute of International Bankers: Loan Loss Provisioning and Pro-cyclicality (Mar. 2, 2009), 

https://www.occ.gov/news-issuances/speeches/2009/pub-speech-2009-16.pdf; Letter from James Kendrick, Vice 

President, Acct. & Cap. Pol’y, Indep. Cmty. Bankers of Amer., to Technical Dir., FASB (May 30, 2013), 

https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-regulators/2013/cl053013.pdf.

7 See, e.g., Basel Comm. on Banking Supervision, Regulatory Treatment of Accounting Provisions 1 (Bank for Int’l 

Settlements, Basel Comm. on Banking Supervision, Discussion Paper, Oct. 2016), 

https://www.bis.org/bcbs/publ/d385.pdf.

8 FASB, supra note 6, at 1.
9

firm’s management’s expectations of future credit losses9:

Many institutions, for example, use forward looking information in 

underwriting, collateral determinations, servicing, and asset-liability 

management practices, but in reporting incurred credit losses under [ILM] use 

only a subset of that information. In addition, management has a tremendous 

amount of information from its risk management systems, again, only a subset 

of which is currently used in financial reporting. [Before adoption of CECL], 

investors are on their own to develop an assessment of expected credit losses. 

After adoption of CECL, management will provide their estimate of expected 

credit losses, which reduces information asymmetry for investors.10

In October 2008, FASB and the International Accounting Standards Board (IASB) established a 

Financial Crisis Advisory Group (FCAG) to advise on potential improvements in financial 

reporting in response to the 2008 financial crisis.11 The FCAG recommended exploring more 

forward-looking alternatives to the ILM. Through 2016, FASB representatives met with 

hundreds of stakeholders, held numerous public roundtables, received over 3,000 comment 

letters, and evaluated a variety of potential alternatives to the ILM.12

On June 16, 2016, FASB adopted CECL through the issuance of FASB Accounting Standards 

Update No. 2016-13 (ASU 2016-13).

13

 FASB and other proponents of CECL have stated that 

CECL provides financial statement users with more forward-looking, decision-useful 

information about expected credit losses than ILM does.

14

 According to FASB, CECL more 

closely aligns a firm’s financial reporting with its management’s estimates of expected credit 

losses.15 

C. CECL and ILM Compared

To prepare financial statements that conform to CECL, a firm must recognize lifetime expected 

 

9 See, e.g., Wesley R. Bricker, Chief Accountant, SEC, Remarks Before the Financial Executives International 36th 

Annual Current Financial Reporting Issues Conference: Effective Financial Reporting in a Period of Change (Nov.

14, 2017), https://www.sec.gov/news/speech/speech-bricker-2017-11-14.

10 Id.

11 For further information concerning the adoption of CECL, see FASB, ACCOUNTING STANDARDS UPDATE NO.

2016-13: FINANCIAL INSTRUMENTS—CREDIT LOSSES (TOPIC 326) 241-284 (2016), 

https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168232528&acceptedDisclaimer=true

(“FASB ACCOUNTING STANDARDS UPDATE NO. 2016-13”).

12 See FASB, ASU: Credit Losses (Topic 326), FASB: UNDERSTANDING COSTS & BENEFITS (June 16, 2016), 

https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176168233403&d=&pagename=FASB%2FDocume

nt_C%2FDocumentPage (“FASB Understanding Costs and Benefits 2016”). 

13 FASB ACCOUNTING STANDARDS UPDATE NO. 2016-13, supra note 11. 

14 FASB Understanding Costs and Benefits 2016, supra note 12.

15 Id. 
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credit losses for financial assets covered by CECL and incorporate reasonable and supportable 

forecasts in developing an estimate of lifetime expected credit losses. A firm must also, similar 

to the existing ILM requirement, consider past events and current conditions.

As applied to financial institutions—including based on rules and guidance issued by the Federal 

Reserve, the FDIC, and the OCC (together, the “banking regulators”)—CECL differs from ILM 

in several key respects. For example, to prepare financial statements that conform to CECL, 

financial institutions must recognize lifetime expected credit losses for financial assets, not just 

credit losses that have been incurred as of the reporting date. Additionally, CECL allowances

cover a broader range of financial assets than ALLL under the other-than-temporarily impaired

concept, as CECL allowances cover all financial assets recorded at amortized cost, including 

held-to-maturity debt securities.16 ASU 2016-13 also introduces new requirements for availablefor-sale (AFS) debt securities.17

 A financial institution must “recognize credit losses on 

individual AFS debt securities through credit loss allowances, rather than through direct writedowns.”

18

 Taken together, these characteristics of CECL (and other aspects of ASU 2016-13) 

result in earlier accounting recognition of a broader range of potential credit losses. CECL does 

not change the cumulative amount of losses ultimately charged off from an asset, relative to 

ILM; it changes the timing of when those losses are recognized for accounting purposes.19 

While CECL generally results in earlier accounting recognition of potential credit losses and 

expenses associated with financial assets, GAAP does not necessarily provide early accounting 

recognition of all revenues associated with those assets. For example, for loans “held for 

investment,”

20 the accounting recognition of net loan fees is deferred and amortized over the life 

of the loan.21 Therefore, the earlier accounting recognition of potential credit losses under CECL 

 

16 See Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology 

for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other 

Regulations, 84 Fed. Reg. 4222 (Feb. 14, 2019), https://www.govinfo.gov/content/pkg/FR-2019-02-14/pdf/2018-

28281.pdf (“Banking Regulators’ 2019 Regulatory Capital Rule”). 

17 Id. at 4223. 

18 Id. As the banking regulators explained in 2019, “[c]urrent accounting standards require a banking organization 

to make an individual assessment of each of its AFS debt securities and take a direct writedown for credit losses 

when such a security is other-than-temporarily impaired.” Id. at 4226.

19 Hal Schroeder, Member, FASB, Opening Remarks at the ThinkBig 2019 Conference: Roadmap to the Future: 

Fact vs. Fiction (on CECL and Other FASB Standards) (Sept. 26, 2019), 

https://www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176173503494&d=&pagename=FASB%2FFAS

BContent_C%2FGeneralContentDisplay (“Schroeder Remarks”). 

20 A loan is generally classified as “held for investment” under GAAP when the reporting entity holds a loan for 

which it “has the intent and ability to hold for the foreseeable future or until maturity or payoff.” FED. FIN. INSTS.

EXAMINATION COUNCIL, INSTRUCTIONS FOR PREPARATION OF CONSOLIDATED REPORTS OF CONDITION AND INCOME: 

FFIEC 031 AND FFIEC 041 RI-8b (2018), 

https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_201812_i.pdf.

21 See FASB, STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 91: ACCOUNTING FOR NONREFUNDABLE 

FEES AND COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS AND INITIAL DIRECT COSTS OF LEASES

(1986),

https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220128141&acceptedDisclaimer=true.
11

may result in a timing mismatch between the recognition of revenues and expenses for certain 

financial assets.22

D. Timing of CECL Effectiveness and Implementation: A Phased Approach

FASB has established a phased approach that subjects different types of financial institutions to 

different CECL compliance dates23:

 For national banks, state member banks, state nonmember banks, savings associations, 

and top-tier bank holding companies and savings and loan holding companies domiciled 

in the United States (collectively, “banking organizations”) that are public business 

entities (PBEs) and SEC filers, excluding those that would qualify as Smaller Reporting 

Companies as defined by the SEC, CECL became effective for the first fiscal year 

beginning after December 15, 2019, including interim periods within that fiscal year.24 

 For all other financial institutions that are required to file regulatory reports that conform 

to GAAP, CECL will become effective for the first fiscal year beginning after December 

15, 2022, including interim periods within that fiscal year.25 

A financial institution may choose to voluntarily adopt CECL early, in any fiscal year beginning 

after December 15, 2018, including interim periods within that fiscal year.26

 

22 A timing mismatch between loss and revenue recognition also exists under ILM, albeit generally to a lesser 

degree, as losses recognized under CECL include those expected to occur in the future. In their dissent against 

FASB’s adoption of CECL in 2016, FASB Vice Chairman James Kroeker and board member Lawrence Smith 

stated their belief that “moving to an expected loss model for recognizing the expected credit losses on financial 

assets can be justified only if the interest income and the related impairment charge are considered together.” See

FASB ACCOUNTING STANDARDS UPDATE NO. 2016-13, supra note 11, at 239.

23 See FASB, ACCOUNTING STANDARDS UPDATE NO. 2019-10: FINANCIAL INSTRUMENTS—CREDIT LOSSES (TOPIC 

326), DERIVATIVES AND HEDGING (TOPIC 815), AND LEASES (TOPIC 842) 2-3 (2019), 

https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176173775344&acceptedDisclaimer=true

(“FASB ACCOUNTING STANDARDS UPDATE NO. 2019-10”). Implementation dates for CECL were changed by 

FASB in late 2019. FASB, FASB Approves Effective Date Delays at October 16 meeting (FASB, Media Advisory, 

Oct. 18, 2019), 

https://www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176173615325&d=&pagename=FASB%2FFAS

BContent_C%2FNewsPage. See also Banking Regulators’ 2019 Regulatory Capital Rule, supra note 16, at 4224 

(listing previous CECL compliance dates for financial institutions). 

24 See FASB ACCOUNTING STANDARDS UPDATE NO. 2019-10, supra note 23. See also FASB, ACCOUNTING 

STANDARDS UPDATE NO. 2013-12: DEFINITION OF A PUBLIC BUSINESS ENTITY (2013), 

https://www.fasb.org/resources/ccurl/757/419/ASU%202013-12.pdf (defining a PBE); Smaller Reporting Company 

Definition, 83 Fed. Reg. 31992 (July 10, 2018), https://www.govinfo.gov/content/pkg/FR-2018-07-10/pdf/2018-

14306.pdf (defining Smaller Reporting Companies); PRUDENTIAL REGULATORS’ FAQS, supra note 3 (discussing 

criteria used for determining whether a financial institution can be considered a PBE or an SEC filer).

25 See FASB ACCOUNTING STANDARDS UPDATE NO. 2019-10, supra note 23.

26 PRUDENTIAL REGULATORS’ FAQS, supra note 3.
12

E. Transition Relief 

As described below in Part II, CECL implementation may be operationally complex for financial 

institutions and can have important implications for financial institutions’ regulatory capital and 

lending activities. Given these and other factors—including the onset of the COVID-19 global 

pandemic—FASB, Congress, and the prudential regulators have taken certain steps designed to 

facilitate the transition to CECL. 

1. February 2019 Relief for Banking Organizations

On February 14, 2019, the banking regulators published a final regulatory capital rule (the 

“Banking Regulators’ 2019 Regulatory Capital Rule”) to provide a transition option that allows 

banking organizations to phase-in over a three-year period certain “day-1” effects from the 

transition to CECL on their regulatory capital ratios.27 The banking regulators intended for the 

transition option to address concerns that, despite adequate capital planning, unexpected 

economic conditions at the time of CECL adoption could result in higher-than-anticipated 

increases in day-1 allowances. Part II below provides additional details on the day-1 effects of 

CECL and related regulatory relief. 

2. October 2019 FASB CECL Implementation Delay for Smaller Institutions

As reflected by the current CECL implementation timeline above, several months after the 

prudential regulators issued the Banking Regulators’ 2019 Regulatory Capital Rule, FASB 

delayed the CECL implementation deadline to the first fiscal year beginning after December 15, 

2022, including interim periods within that fiscal year, for all PBEs that met the Smaller 

Reporting Companies definition or entities that were not SEC filers.

28

 According to one FASB 

official, this change resulted in the CECL implementation deadline being moved from January 

2021 to January 2023 for over 90 percent of financial services companies.29

3. CARES Act Relief

On March 27, 2020, President Donald J. Trump signed the Coronavirus Aid, Relief, and 

Economic Security Act (CARES Act) into law.30 Among other things, the CARES Act provides 

banking organizations optional temporary relief from complying with CECL ending on the 

 

27 See Banking Regulators’ 2019 Regulatory Capital Rule, supra note 16.

28 See FASB ACCOUNTING STANDARDS UPDATE NO. 2019-10, supra note 23.

29 Schroeder Remarks, supra note 19. 

30 Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, 116th Cong. (2020), 

https://www.congress.gov/bill/116th-congress/house-bill/748/text.
13

earlier of (1) the termination date of the COVID-19 national emergency declared by President 

Trump on March 13, 2020, under the National Emergencies Act, or (2) December 31, 2020.31

4. March and August 2020 Relief for Banking Organizations

Also on March 27, 2020, in recognition of the disruptions in economic conditions caused by the 

COVID-19 global pandemic and related operational challenges faced by banking organizations, 

the banking regulators issued an interim final rule (IFR) that delays the estimated impact on 

regulatory capital stemming from CECL for a transition period of up to five years.32 On August 

26, 2020, the banking regulators issued a final rule that, with a few exceptions, generally aligns 

with the IFR.

33 As explained below in Part II, the final rule provides banking organizations that 

adopt CECL during 2020 the option to mitigate an estimate of CECL’s impact on their 

regulatory capital for two years, followed by a three-year transition period.34

5. July 2020 NCUA Rulemaking Proposal

On July 30, 2020, the NCUA approved a proposed rule that—consistent with the banking 

regulators’ rules delaying the estimated impact on regulatory capital stemming from CECL—

would phase-in the day-1 effects of CECL on federally insured credit unions’ net worth ratio 

over a three-year period, as discussed further below.

35

 Additionally, the NCUA proposed to 

exempt credit unions with less than $10 million in assets from determining their charges for loan 

losses in accordance with GAAP, including CECL.36

 

31 15 U.S.C. § 9052 (2020).

32 See Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for 

Allowances, 85 Fed. Reg. 17723 (Mar. 31, 2020), https://www.govinfo.gov/content/pkg/FR-2020-03-31/pdf/2020-

06770.pdf (“Banking Regulators’ 2020 IFR”). The Banking Regulators’ 2020 IFR was announced on March 27, 

2020. OCC, Current Expected Credit Losses: Interim Final Rule (OCC, Bulletin 2020-27, Mar. 27, 2020), 

https://www.occ.treas.gov/news-issuances/bulletins/2020/bulletin-2020-27.html.

33 See OCC, Federal Reserve & FDIC, Regulatory Capital Rule: Revised Transition of the Current Expected Credit 

Losses Methodology for Allowances (Aug. 26, 2020), 

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200826a2.pdf (“Banking Regulators’ 2020 

Final Rule”).

34 Alternatively, banking organizations may use the regulatory capital CECL transition provided in the Banking 

Regulators’ 2019 Regulatory Capital Rule. See FEDERAL RESERVE, FDIC & OCC, JOINT STATEMENT ON THE 

INTERACTION OF REGULATORY CAPITAL RULE: REVISED TRANSITION OF THE CECL METHODOLOGY FOR 

ALLOWANCES WITH SECTION 4014 OF THE CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (2020), 

https://www.occ.treas.gov/news-issuances/bulletins/2020/bulletin-2020-30a.pdf.

35 Transition to the Current Expected Credit Loss Methodology, 85 Fed. Reg. 50963 (proposed July 30, 2020), 

https://www.govinfo.gov/content/pkg/FR-2020-08-19/pdf/2020-16987.pdf (“NCUA 2020 Proposed Rule”).

36 Id.
14

II. CECL’s Implications for 

Financial Institution 

Regulatory Capital
15

II. CECL’s Implications for Financial Institution Regulatory Capital 

A. Effects of CECL on Financial Institutions’ Capital Requirements

1. Overview

Financial institutions subject to risk-based capital requirements in the United States are required 

to maintain specified levels of regulatory capital based on the type of financial institution and the 

riskiness of the particular assets that the institution holds. The functions of regulatory capital are 

to support the financial institutions’ operations, absorb unanticipated losses and declines in asset 

values that could otherwise cause an institution to fail, and provide protection to uninsured 

depositors and debt holders in the event of a liquidation.

37

CECL will affect financial institutions in different ways, depending on a given institution’s 

business model (e.g., nature and mix of lending activities), as well as its credit modeling, risk 

management, and related accounting practices (e.g., how it estimates the allowance for credit 

losses), among other factors. A financial institution’s implementation of CECL will also likely 

impact its regulatory capital ratios.38 

As described above, to prepare financial statements that conform to CECL, financial institutions 

must recognize lifetime expected credit losses for financial assets—not only, as is the case under 

ILM, credit losses that are probable and estimable as of the reporting date.39 In addition, CECL 

applies to a wider range of financial assets than ILM.40 As a result, CECL will generally41

require financial institutions to establish greater credit loss allowances than under ILM. That is, 

CECL will generally increase a financial institution’s allowance for credit losses relative to its 

ALLL.42 All else equal, an increase in credit loss allowances will reduce the institution’s GAAP 

net income—and thus its retained earnings.

43

 This may be significant for bank capital purposes 

 

37 Federal Reserve, Supervisory Policy and Guidance Topics: Capital Adequacy, 

https://www.federalreserve.gov/supervisionreg/topics/capital.htm (last updated Aug. 4, 2020).

38 See Banking Regulators’ 2020 Final Rule, supra note 33, at 5.

39 CECL does not specify a single method for measuring expected credit loss, and instead allows any reasonable 

approach as long as it achieves the new GAAP objectives for credit loss estimates. See FASB Understanding Costs 

and Benefits 2016, supra note 12.

40 See PRUDENTIAL REGULATORS’ FAQS, supra note 3. 

41 Certain financial institutions’ allowances under CECL could be lower than under ILM, depending on factors such 

as their portfolio mix and internal risk modeling estimates (including of recovery rates). 

42 See Bert Loudis & Ben Ranish, CECL and the Credit Cycle (Federal Reserve, Fin. & Econ. Discussion Series 

2019-061, May 30, 2019), https://www.federalreserve.gov/econres/feds/files/2019061pap.pdf; Francisco Covas &

William Nelson, Current Expected Credit Loss: Lessons from 2007-2009 (Bank Pol’y Inst., Staff Working Paper 

2018-1, July 12, 2018), https://bpi.com/wp-content/uploads/2018/07/CECL-Lessons-2007-2009-WP-July-12-

2018.pdf.

43 In general, greater CECL credit loss allowances will primarily impact regulatory capital through changes in 

retained earnings, but will likely also impact regulatory capital through changes in deferred tax assets and allowance 

levels. For example, changes in allowance levels may impact the amount of a firm’s tier 2 regulatory capital. See

Banking Regulators’ 2019 Regulatory Capital Rule, supra note 16, at 4226.
16

because retained earnings are a major component of a banking organization’s common equity 

tier 1 (CET1) capital. A reduction in CET1 capital lowers the banking organization’s CET1 

capital ratio, since CET1 capital is the numerator in this capital ratio. CET1 capital is also a key 

input to various other financial institution regulatory capital measures.44

Credit unions may also be affected by an increase in loss allowances under the transition to 

CECL. In general, the vast majority of a credit union’s net worth (which is the numerator in the 

credit union capital ratio) is the accumulation of retained earnings, since credit unions are 

generally not allowed to raise capital from other sources.45 Credit unions are subject to net worth 

requirements, and some will soon also be subject to a risk-based capital requirement.46 Net 

worth requirements can be met with retained earnings, while the NCUA’s risk-based capital 

requirement, which is scheduled to become effective in 2022, can be met with both retained 

earnings and the allowance balance.47 All else equal, credit unions—like banking 

organizations—that increase credit loss allowances will have reduced GAAP net income and 

thus reduced retained earnings, which will likely lower their capital adequacy ratio, the “net 

worth ratio.” 

2. Day-1 and Ongoing Effects

Financial institutions are impacted by CECL through a potentially significant “day-1” impact, as 

well as through their ongoing quarterly adjustments to their allowances for credit losses over the 

lives of loans and other financial assets. Upon its adoption of CECL, a financial institution must 

record a one-time adjustment to its allowances to reflect the difference, if any, between 

allowances required under ILM and CECL. Additionally, thereafter, on a quarterly basis, a 

financial institution must revisit and, as necessary, update its estimate of credit losses to account 

for management’s current expectation of credit losses based on economic conditions and other 

factors.48 

Some have raised concerns that the day-1 and ongoing effects on financial institutions’ 

regulatory capital may ultimately reduce financial institutions’ capacity to lend, particularly in an 

economic downturn when loss estimates may be higher, as explained below in Part III. 

 

44 For example, CET1 capital is required to calculate a banking organization’s other regulatory capital ratios, 

including the tier 1, total risk-based capital, tier 1 leverage, and supplementary leverage ratios.

45 12 C.F.R. § 702.2 (2020). By contrast, banking organizations’ regulatory capital can include common stock and 

subordinated debt, in addition to retained earnings.

46 Starting in 2022, credit unions with more than $500 million in assets will be subject to the NCUA’s risk-based net 

worth requirements. 12 C.F.R. §§ 700, 701, 702, 703, 713, 723 & 747 (2020). 

47 PRUDENTIAL REGULATORS’ FAQS, supra note 3, at 19.

48 See, e.g., Thomas W. Killian & Weison Ding, CECL – Ready or Not Here it Comes (Piper Sandler, Report, Jan. 

28, 2020), http://www.pipersandler.com/private/pdf/CECL_ready_or_not.pdf; Lauren Sullivan, Banks Begin to 

Provide ‘Day 2’ CECL Guidance, S&P GLOBAL MKT. INTELLIGENCE (Jan. 31, 2020),

https://www.spglobal.com/marketintelligence/en/news-insights/trending/fypj5vewog838ovl6z3mug2.
17

B. Key Regulatory Responses Related to Regulatory Capital

The prudential regulators have acknowledged many of the potential challenges and effects of 

financial institutions’ implementation of CECL and have taken various actions in response, 

described below. 

1. 2018 Federal Reserve Stress Test Statement

On December 21, 2018, the Federal Reserve announced that it planned to maintain the current 

modeling framework for loan allowances in its supervisory stress test process through 2021 to 

provide more time for it to analyze the potential impacts of CECL.49 The Federal Reserve chose 

to maintain the current framework in supervisory stress tests in order to reduce uncertainty and 

allow for better capital planning at affected banking organizations, among other reasons.50 In 

addition, as part of the Banking Regulators’ 2019 Regulatory Capital Rule, the Federal Reserve 

amended its stress testing rules to require a covered banking organization that has adopted CECL 

to incorporate CECL in its company-run stress testing methodologies, data, and disclosure 

beginning in the 2020 stress testing cycle.51 The Federal Reserve also announced on December 

21, 2018, that it would not issue supervisory findings on a firm’s stressed estimation of its 

allowances under CECL any earlier than 2022.52 

2. 2019 Banking Regulators’ Transitions Final Rule

On February 14, 2019, the banking regulators published revisions to their capital rules to clarify 

expectations for credit loss accounting under CECL.53 Among other things, the banking 

regulators adopted revisions to their capital rules to identify which credit loss allowances under 

CECL are eligible for inclusion in a banking organization’s regulatory capital. For example, the 

agencies added a newly defined term “adjusted allowances for credit losses” (AACL) to replace 

ALLL and identify which credit loss allowances would have certain regulatory capital 

implications.54 AACL applies to a wider range of assets than ALLL.55 Additionally, in an effort 

to help address some of the potential challenges of managing the day-1 effects on a banking 

organization’s regulatory capital ratios associated with CECL implementation, the banking 

regulators provided banking organizations with the option to phase-in the day-1 effects of CECL 

 

49 See FEDERAL RESERVE, STATEMENT ON THE CURRENT EXPECTED CREDIT LOSS METHODOLOGY (CECL) AND 

STRESS TESTING (2018), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20181221b1.pdf.

50 Id.

51 Id.

52 Id.

53 Banking Regulators’ 2019 Regulatory Capital Rule, supra note 16. 

54 The banking regulators introduced AACL to identify which credit loss allowances have been charged against net 

income or retained earnings and would therefore be eligible to be included in regulatory capital. Like ALLL, the 

amount of AACL that may count as tier 2 capital is limited to 1.25 percent of a banking organization’s standardized 

total risk-weighted assets (excluding its standardized market risk-weighted assets, if applicable). See id. at 4224-25.

55 See id. at 4225-26.
18

over a three-year period.56

3. March 2020 FDIC Chairman McWilliams Request for CECL Relief 

On March 19, 2020, FDIC Chairman Jelena McWilliams sent a letter to FASB that, among other 

things, urged FASB to allow banks that are currently subject to CECL to have the option of 

postponing CECL implementation.57 Chairman McWilliams’ letter also urged FASB to impose 

a moratorium on the CECL effective date for those institutions that are not currently required to 

implement CECL in order to allow those institutions “to focus on immediate business challenges 

relating to the impacts of the current pandemic and its effect on the financial system.”58 

Chairman McWilliams’ letter noted that transitioning to CECL “for smaller institutions is a 

significant effort in both financial and staffing commitment” and that institutions “under current 

conditions need to apply their full efforts, focus, and resources toward working to ensure the 

safety of their staff, customers, and local communities.”59 

4. March and August 2020 Banking Regulators’ Relief

As noted above, on March 27, 2020, in response to the COVID-19 global pandemic, the banking 

regulators issued an IFR that delays the estimated impact on regulatory capital stemming from 

CECL for a transition period of up to five years for banking organizations required to adopt 

CECL in 2020. The banking regulators recognized that the COVID-19 global pandemic

presents “significant operational challenges to banking organizations at the same time they have 

been required to direct significant resources to implement CECL.”60 The agencies also 

recognized that “due to the nature of CECL and the uncertainty of future economic forecasts, 

banking organizations that have adopted CECL may continue to experience higher-thananticipated increases in credit loss allowances.”61

On August 26, 2020, the banking regulators issued a final rule that generally aligns with the IFR, 

except for clarifications regarding the transition calculation and an expansion in the scope of the 

rule to apply to any firm adopting CECL in 2020 that chooses to use the transition.

62

 The relief

under the final rule provides banking organizations that adopt CECL during 2020 the option to 

delay an estimate of CECL’s impact on regulatory capital for two years, followed by a three-year 

transition period to phase out the capital benefit provided during the initial two-year 

 

56 Id. at 4227. The agencies also made other amendments to address CECL changes. See id. at 4229-30.

57 Letter from Jelena McWilliams, Chairman, FDIC, to Shayne Kuhaneck, Acting Technical Dir., FASB (Mar. 19, 

2020), https://www.fdic.gov/news/press-releases/2020/pr20036a.pdf.

58 Id. at 2.

59 Id.

60 Banking Regulators’ 2020 IFR, supra note 32, at 17725.

61 Id.

62 While the IFR limited relief only to banking organizations required to adopt CECL during 2020, the final rule 

permits any banking organization that elects CECL in 2020 to use the five-year transition relief. See Banking 

Regulators’ 2020 Final Rule, supra note 33.
19

delay. Taken together, these measures offer electing banking organizations a transition period of 

up to five years. The agencies endeavored to calibrate the capital relief—by providing a capital 

offset—to approximate the difference in allowances under CECL relative to ILM during the first 

two years of the transition period.63 During the initial two-year period following 

implementation, electing banking organizations are permitted to add back to CET1 capital the

day-1 after-tax change in retained earnings resulting from adopting CECL plus 25 percent of the 

ongoing difference between AACL reported in the firm’s most recent regulatory filings and the 

day-1 AACL.

64

 The banking regulators calibrated the standardized 25 percent scaling factor to 

approximate the effect of using CECL rather than ILM. The cumulative difference at the end of 

the second year of the transition period is then phased out of regulatory capital over a three-year 

transition period. In this way, this final rule gradually phases in the day-1 and ongoing effects on 

regulatory capital over a five-year transition period.

Banking organizations adopting CECL alternatively have the option of using the banking 

regulators’ three-year implementation approach, in which they phase-in the day-1 effects of 

CECL over a three-year period. 

5. April 2020 NCUA Chairman Hood Request for Credit Union Exemption

On April 30, 2020, NCUA Chairman Rodney E. Hood sent a letter to FASB requesting that 

FASB permanently exempt credit unions from complying with CECL.65 In his letter, Chairman 

Hood stated that in the context of credit unions “the compliance costs associated with 

implementing CECL overwhelmingly exceed the benefits” and that “the continued challenges of 

resource constraints and data system challenges [associated with CECL implementation for 

credit unions] seem to outweigh the anticipated benefits of financial statement comparability 

between credit unions and the rest of the financial sector.” 

6. July 2020 NCUA Proposed Rule

On July 30, 2020, the NCUA approved a proposed rule that—consistent with the banking 

regulators’ rules delaying the estimated impact on regulatory capital stemming from CECL—

would phase-in the day-1 effects of CECL on federally insured credit unions’ net worth ratio 

over a three-year period.66 The phase-in would only be applied to those federally insured credit 

unions that adopt CECL for fiscal years beginning on or after December 15, 2022 (the deadline 

established by FASB for credit union implementation). Credit unions that decide to adopt CECL 

 

63 Id. at 14.

64 Id.

65 Letter from Rodney E. Hood, Chairman, NCUA, to Russell G. Golden, Chairman, FASB (Apr. 30, 2020), 

https://www.ncua.gov/about-ncua/leadership/honorable-rodney-e-hood/publications-chairman-rodney-e-hood/letterfasb-urging-cecl-exemption-credit-unions (“Chairman Hood Letter”).

66 NCUA 2020 Proposed Rule, supra note 35.
20

for fiscal years beginning before then would be ineligible for the proposed phase-in. 

Additionally, the NCUA proposed to exempt credit unions with less than $10 million in assets 

from determining their charges for loan losses in accordance with GAAP, including CECL.67

The NCUA proposed that these institutions may “instead use any reasonable reserve 

methodology (incurred loss), provided that it adequately covers known and probable loan 

losses.”68

 

67 Id.

68 Id. at 50963.
21

III. Key Areas of Debate
22

III. Key Areas of Debate

In the time since CECL was first considered in concept, financial institution representatives, 

accountants, public officials, academics, and others have discussed and debated various benefits,

concerns, and potential effects of CECL’s application to financial institutions and their 

regulatory capital and lending. While the issues raised have been wide-ranging, what follows is 

a high-level summary of some of the main themes. 

 Potential Procyclical Effects. Some, including FASB officials,69 anticipate that CECL 

will have less procyclical effects70 than ILM because a greater level of allowances would 

be accumulated before an economic downturn due to the fact that allowances will be 

made for expected lifetime credit losses (as opposed to only for probable credit losses). 

On the other hand, some financial institution representatives and researchers argue that 

CECL will be more procyclical than ILM.71 They argue that CECL will result in a larger 

increase in loss allowances at the start of an economic downturn (in part because of the 

challenges in accurately predicting turning points in economic cycles), which will cause 

financial institutions to deleverage and reduce their lending at the onset of an economic 

downturn—particularly for longer-tenored products like mortgages and student loans—

thus potentially exacerbating the downturn. The divergence in views about the 

procyclicality of CECL appears to be due, in part, to variations in the assumptions and 

modeling underlying different research on the topic.72

 Disagreement Regarding Whether Benefits Justify Costs. Some industry 

representatives, regulators, and members of Congress have questioned whether the 

potential costs associated with CECL—for instance, operational implementation costs, 

including employee and management resources; training; software development; and 

accounting, consulting, and legal fees—are worth the perceived benefits of CECL, such 

 

69 Schroeder Remarks, supra note 19. See also Sarah Chae et al., The Impact of the Current Expected Credit Loss 

Standard (CECL) on the Timing and Comparability of Reserves (Federal Reserve, Fin. & Econ. Discussion Series 

2018-020, Mar. 6, 2018), https://www.federalreserve.gov/econres/feds/files/2018020pap.pdf.

70 “Procyclical” refers to when a given policy has the effect of magnifying or amplifying fluctuations in an economic 

cycle; the term “countercyclical” means the opposite—i.e., a given policy has the effect of dampening or reducing 

fluctuations. See Larry D. Wall, Procyclicality: CECL Versus Incurred Loss Model, FED. RESERVE BANK OF 

ATLANTA CTR. FOR FIN. INNOVATION & STABILITY: NOTES FROM THE VAULT (Oct. 2019), 

https://www.frbatlanta.org/cenfis/publications/notesfromthevault/10-procyclicality-cecl-versus-incurred-loss-model2019-10-31.

71 Bank Pol’y Inst. Staff, The current expected loss (CECL) accounting standard will make the next recession worse, 

UNDERWRITINGS: THE BPI BLOG (July 16, 2018), https://bpi.com/analysis-demonstrates-that-the-current-expectedcredit-loss-cecl-accounting-standard-would-be-procyclical-if-used-for-regulatory-capital-purposes/; Amer. Bankers 

Ass’n, ABA Snapshot of Banks’ CECL Estimates – May 2019 (Amer. Bankers Ass’n, Data, May 1, 2019), 

https://www.aba.com/-/media/documents/data/cecl-loss-rate-expectations-may-2019.pdf.

72 Wall, supra note 70; Joseph L. Breeden, CECL Procyclicality: It Depends on the Model (Working Paper, Sept. 

14, 2018), https://www.prescientmodels.com/articles/CECL-Procyclicality.pdf.
23

as the potentially more forward-looking information for users of financial statements.73 

Some credit unions and community banks note that they have less resources to devote to 

CECL implementation than larger financial institutions do.

74

 As explained above, NCUA 

Chairman Hood has noted in the context of credit unions that “the compliance costs 

associated with implementing CECL overwhelmingly exceed the benefits” and that “the 

continued challenges of resource constraints and data system challenges [associated with 

CECL implementation for credit unions] seem to outweigh the anticipated benefits of 

financial statement comparability between credit unions and the rest of the financial 

sector.”75 When adopting CECL, FASB recognized that organizations are likely to incur 

costs associated with implementing the new standard. However, FASB expected that 

organizations would be able to leverage many of their existing financial reporting 

processes and concluded that the ongoing costs for most organizations of preparing the 

allowance for credit losses under CECL should not be significantly above the costs of 

complying with the accounting model under the ILM approach.76

 Evaluating the Need to Recalibrate Capital Requirements in Light of CECL. Some 

industry representatives have argued that financial institution capital frameworks should 

be reviewed and potentially recalibrated in response to CECL.77 Many of these 

arguments note that the existing capital requirements were designed and calibrated under 

the ILM framework, and therefore, the capital framework should be revisited to ensure 

that CECL implementation does not effectively increase capital requirements. For 

example, comments submitted in response to the Banking Regulators’ 2019 Regulatory 

Capital Rule suggest that some support changing the regulatory capital treatment of credit 

 

73 See, e.g., Amer. Bankers Ass’n, Statement for the Record Before the Investor Protection, Entrepreneurship, and 

Capital Markets Subcommittee of the Committee on Financial Services, U.S. House of Representatives (Jan. 15, 

2020), https://www.aba.com/advocacy/policy-analysis/statement-overseeing-standard-setters-fasb-pcaobexamination.

74 See, e.g., id. See also Letter from Ronald McLean, President/CEO, Coop. Credit Union Ass’n, Inc., to Technical 

Dir., FASB (Sept. 16, 2019), 

https://www.ccua.org/images/uploads/CCUA_FASB_CECL_Delay_Exposure_Draft_ASU_2019.750.pdf; Letter 

from Christopher L. Williston, President & CEO, Indep. Bankers Ass’n of Tex., to Legis. & Reg. Activities Div., 

OCC (July 11, 2018), https://www.regulations.gov/document?D=OCC-2018-0009-0006.

75 Chairman Hood Letter, supra note 65. 

76 See FASB Understanding Costs and Benefits 2016, supra note 12.

77 See, e.g., Letter from David Wagner, Senior Vice President, Head of Fin., Risk & Audit Affairs & Dep’y Gen. 

Counsel, Bank Pol’y Inst., to Legis. & Reg. Activities Div., OCC, Ann E. Misback, Sec’y, Federal Reserve, and 

Robert E. Feldman, Exec. Sec’y, FDIC (July 13, 2018), https://bpi.com/wp-content/uploads/2018/07/BPI-CECLComment-Letter-Final.pdf.
24

loss allowances.78 Conversely, some point out that banking regulators’ efforts to smooth 

CECL implementation’s impact on regulatory capital are sufficient.

79

 Potentially Disparate Effects on Certain Types of Lending. Some industry 

representatives have argued that CECL will affect the availability and cost of certain 

lending products, for example, longer-tenor loans.80 Under CECL, longer-tenor loans 

generally have higher expected lifetime loss rates than shorter-tenor loans. As a result, 

these longer-tenor assets may require greater upfront allowances. Because CECL 

requires lifetime expected credit losses on loans to be recognized immediately, but the 

revenues from those loans are not recognized up-front under GAAP, under CECL 

originating a new loan could decrease the lender’s GAAP earnings. These accounting 

results, according to this argument, could potentially change how a financial institution 

offers, prices, and structures certain lending products.81 

 Potentially Disparate Effects on Certain Types of Lenders. Some industry 

representatives have argued that CECL will disproportionately affect lenders that have 

large loan portfolios in, or specialize in, consumer loans. Additionally, as stated above, 

CECL may have disproportionate operational and implementation effects on smaller 

institutions, which do not have the same level of resources as larger financial institutions 

to devote to the operational, accounting, strategy, and other work relating to a transition 

to CECL. However, in 2016, the prudential regulators stated that they expected that 

smaller and less complex institutions would be able to adjust their existing allowance 

methods to meet the requirements of CECL without the use of costly and complex 

models.82

 

78 See id.; Letter from Michael L. Gullette, Senior Vice President, Tax & Acct., Amer. Bankers Ass’n, to Legis. & 

Reg. Activities Div., OCC, Ann E. Misback, Sec’y, Federal Reserve & Robert E. Feldman, Exec. Sec’y, FDIC (July 

13, 2018), https://www.regulations.gov/document?D=OCC-2018-0009-0013. See also Banking Regulators’ 2019 

Regulatory Capital Rule, supra note 16, at 4231.

79 See, e.g., Michael Rapoport, Banks Got Accounting Relief. Investors May Suffer., INSTITUTIONAL INVESTOR (Apr. 

3, 2020), https://www.institutionalinvestor.com/article/b1l5q4vzrxs18n/Banks-Got-Accounting-Relief-InvestorsMay-Suffer.

80 See, e.g., David Wagner, Two Fixes for CECL’s Problematic Capital Impact, UNDERWRITINGS: THE BPI BLOG 

(May 22, 2019), https://bpi.com/two-fixes-for-cecls-problematic-capital-impact/ (“Wagner 2019”); Amer. Bankers 

Ass’n, supra note 73.

81 See Killian & Ding, supra note 48 (stating that “[l]onger duration and higher risk loans will attract much higher 

CECL reserves” and “[a]s such, student loans, longer term consumer credit and higher risk loans may face limits on 

availability or repricing of credit”).

82 FEDERAL RESERVE, FDIC, NCUA & OCC, JOINT STATEMENT ON THE NEW ACCOUNTING STANDARD ON 

FINANCIAL INSTRUMENTS – CREDIT LOSSES 4 (2016),

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160617b1.pdf.
25

IV. Recommendations
26

IV. Recommendations 

Treasury has monitored the planning for the transition to CECL, including CECL’s potential 

effects on regulatory capital and financial institutions’ lending practices. For example, in its 

June 2017 Executive Order report “A Financial System that Creates Economic Opportunities:

Banks and Credit Unions,” Treasury recommended that the prudential regulators carefully 

review the potential impact of CECL on banks’ capital levels “with a view towards harmonizing 

the application of the standard with regulators’ supervisory efforts.”83 The Financial Stability 

Oversight Council (FSOC), chaired by the Secretary of the Treasury, has also considered the 

CECL transition, including through discussions at FSOC meetings with presentations by 

representatives from the financial regulatory agencies.84 

Treasury supports the goals of CECL—including providing users of financial statements with 

more forward-looking information and carrying assets on financial statements in a manner that 

reflects amounts expected to be collected. Treasury also recognizes the seriousness of the 

concerns that have been raised concerning CECL’s potential effects on and implications for 

regulatory capital, lenders, borrowers, and the economy. 

A definitive assessment of the impact of CECL on financial institutions’ regulatory capital is not 

feasible at this time, in light of the state of CECL implementation across financial institutions

and current market dynamics. As discussed above, FASB has taken a phased approach to CECL 

implementation, and the CARES Act and the banking regulators have provided various forms of 

CECL accounting and regulatory capital relief. Further, the first phase of the transition to CECL 

in early 2020 coincided with the onset of the COVID-19 global pandemic and its innumerable 

direct and indirect effects on borrowers, lenders, the financial system, and the economy, 

including the unprecedented government response efforts in the United States and globally. 

While some information has emerged indicating that credit availability declined and lending 

standards tightened in some financial product categories in early 2020,85 identifying a definitive 

 

83 A Financial System that Creates Economic Opportunities: Banks and Credit Unions 13 (Treasury, Report to 

President Donald J. Trump, June 2017), https://www.treasury.gov/press-center/pressreleases/Documents/A%20Financial%20System.pdf. 

84 For example, at the December 19, 2018, FSOC meeting, then-Comptroller of the Currency Joseph Otting 

presented on CECL’s potential implications on bank capital and lending, followed by a discussion. See FSOC, 

Minutes of the Financial Stability Oversight Council (Dec. 19, 2018), 

https://home.treasury.gov/system/files/261/December192018_minutes.pdf. At the November 7, 2019, FSOC 

meeting, following an interagency staff presentation, FSOC discussed the potential impact CECL may have on the 

allowances held at various financial institutions, among other things. See FSOC, Minutes of the Financial Stability 

Oversight Council (Nov. 7, 2019), https://home.treasury.gov/system/files/261/November072019-minutes.pdf. 

85 See, e.g., Federal Reserve, Div. of Monetary Affairs, The July 2020 Senior Loan Officer Opinion Survey on Bank 

Lending Practices (Federal Reserve, Div. of Monetary Affairs, Report, Aug. 3, 2020), 

https://www.federalreserve.gov/data/documents/sloos-202007-fullreport.pdf; Mortgage Bankers Ass’n, Mortgage

Credit Availability Decreased in June (Mortgage Bankers Ass’n, Press Release, July 9, 2020), 

https://www.mba.org/2020-press-releases/july/mortgage-credit-availability-decreased-in-june; Matt Schulz, About 

70 Million Cardholders Had Credit Limits Cut, Card Accounts Closed Involuntarily in Past 60 Days, 
27

linkage between any such trends and the introduction of the CECL standard is challenging, given 

the presence of numerous economic factors and other market externalities related to the COVID19 global pandemic. 

Together, the state of CECL implementation and the economic effects of, and government 

responses to, the COVID-19 global pandemic result in an incomplete and unclear dataset from 

which it is challenging to draw definitive conclusions regarding CECL. More information is 

needed before reaching conclusions concerning any potential changes to regulatory capital 

requirements that may be necessitated by CECL. 

Treasury will continue to actively monitor CECL implementation and consult with relevant 

stakeholders, including the prudential regulators, FASB, and the SEC. Treasury makes the 

following recommendations at this time: 

1. The prudential regulators should continue to monitor the effects of CECL on 

regulatory capital and financial institution lending practices, and calibrate capital 

requirements, as necessary. The banking regulators have committed to closely 

monitoring the effects of CECL on regulatory capital and bank lending practices, 

including reviewing data provided by banking organizations, as well as information 

observed from banking organizations before their adoption of CECL.86 Once greater 

amounts of data become available regarding financial institutions’ experience with 

CECL, the prudential regulators should consider quantitatively studying the implications 

of CECL for regulatory capital, including any procyclical effects and operating costs. 

2. The prudential regulators should monitor the use and impact of transitional relief

granted, and extend or amend the relief, as necessary. The COVID-19 global pandemic 

and its effects across the global economy have been acute, despite extraordinary efforts to 

manage and dampen its effects on the financial system and the economy. The targeted 

relief provided by the CARES Act and the banking regulators (and proposed by the 

NCUA) are well-tailored to help ease the transition to CECL, given the uncertainty and 

challenges facing financial institutions related to the COVID-19 global pandemic. The 

prudential regulators should continue to monitor the use and impact of the regulatory 

transition periods, and extend or amend the relief, as necessary. The banking regulators’ 

monitoring could consider, for example, whether refinements to the transition calculation 

to better approximate CECL’s effect on regulatory capital are warranted. 

3. FASB should further study CECL’s anticipated benefits. FASB, in consultation with 

the SEC, should continue its outreach efforts to preparers and users of financial 

 

COMPARECARDS (July 22, 2020), https://www.comparecards.com/blog/credit-card-limits-cut-card-accounts-closedpandemic/.

86 See Banking Regulators’ 2019 Regulatory Capital Rule, supra note 16, at 4231.
28

statements to assess how estimates prepared under CECL are being used, in an effort to 

better understand how CECL has been implemented and whether it is having its intended 

effects. FASB should also consider publishing a report of its findings and conclusions in 

this area. FASB should also examine how it could coordinate with the prudential 

regulators to consider the results of any of their reviews and consider whether any 

potential changes to CECL (or other accounting standards) could help limit potential 

procyclical effects or other consequences to lending practices, borrowers, and lenders. 

4. FASB should expand its efforts to consult and coordinate with the prudential 

regulators to understand—and take into account when considering any potential 

amendments to CECL—the regulatory capital effects of CECL on financial 

institutions. It may be impractical for FASB to specifically tailor its accounting 

standards on an industry-by-industry basis to address potential implications for every 

sector. However, at the same time, given the significant role that regulatory capital 

requirements and other forms of prudential regulation have for financial institutions and 

the financial system more generally, Treasury recommends that FASB expand its efforts 

to consult and coordinate with the prudential regulators when considering any potential 

future amendments to CECL. 

5. FASB should, in consultation with relevant stakeholders, explore the costs and benefits 

of further aligning the timing of the accounting recognition of fees associated with 

financial assets under GAAP with the earlier accounting recognition of potential credit 

losses under CECL. While CECL results in earlier accounting recognition of potential 

credit losses, GAAP does not provide for early accounting recognition of revenues

associated with financial assets. Conceptually, the deferral and amortization of the 

recognition of fees, in particular, is not entirely consistent with the upfront recognition of 

lifetime expected credit losses under CECL. As a result of these accounting treatments, 

there may be a mismatch between the information in a financial institution’s financial 

statements and the state of the firms’ financial health (a dynamic that also exists under 

ILM).87 Therefore, FASB should—in consultation with investors and other users of 

financial statements, financial institutions, the SEC, and the prudential regulators—

explore the costs and benefits of further aligning the timing of the accounting recognition 

of loss reserves under CECL with the timing of the accounting recognition of fees 

associated with the relevant financial asset. 

6. FASB, together with the prudential regulators, should examine the application of 

CECL to smaller lenders. As discussed above, FDIC Chairman McWilliams and NCUA 

Chairman Hood separately requested relief from FASB for community banks and credit 

unions, respectively. FASB should also examine how it can coordinate with the 

 

87 See supra note 22. 
29

prudential regulators to evaluate and account for the costs and benefits of the transition to 

CECL for community banks and credit unions—and assess the potential costs and 

benefits of exempting them from CECL or providing other relief.