Current Expected Credit Loss (CECL)

Implementing Term Probability of Default to meet CECL Compliance Requirements

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FASB’s new accounting standard, ASU No. 2016-13, commonly referred to as “CECL,” will require banks to calculate continual, life-of-loan estimated credit losses on entire commercial & industrial (C&I) portfolios. Although mandatory adoption begins in 2019, this unprecedented change from the longstanding incurred loss model will result in significantly more loan data collection and analysis than ever before; banks need to begin to develop or enhance models and infrastructure immediately.

RapidRatings has developed a series of Long Term Probabilities of Default (PDs), a key requirement for many banks in estimating future losses. Our Term PDs run 12 months to 10 years on public and private non-financial companies.

  • Initiate PD x LGD (Loss Given Default) as the preferred C&I model
  • Provide an authoritative second opinion on legacy or newly implemented internal or third-party systems
  • Avoid compiling and parsing large-scale statistics on which to base PD assessments

Request a Demo

Ready to see how you can mitigate risk and capitalize on opportunity?  Request a demo today.

Request a Demo
"According to the OCC, of the $4.1 trillion in Shared National Credits commitments most recently outstanding, fully half matures in Years Four and Five; nearly 10% matures even later."

What are the Top CECL Implementation Considerations & Challenges?

  • Are your champion and challenger models calculating the most accurate allowance for lease and loan losses (ALLL)?
  • Do you have the historical data required to satisfy modeling requirements?
  • How are you implementing automated solutions and data feeds to support CECL’s massive scale?
  • Are you deploying loan level data in a PD method and will your model be able to assess any loan tenors?
  • How will auditors and regulators react to your reasonable and supportable estimations?
  • Will volatility in the market affect your Merton-based models negatively?
  • How well will your CECL model align with origination, lending, reporting, and monitoring functions?


CECL Modeling and Accounting

Banks are considering several types of models for complying with CECL implementation.  While there are benefits and challenges for each of the models, many feel PD x LGD will provide the most accurate calculation of expected credit losses. Implementing a PD x LGD model will result in the most accurate calculation of ALLL due to the focus on loan level data.  Many larger banks are implementing Term PDs for their C&I book, as defined by: Estimated Credit Loss = Probability of Default x Loss Given Default; or, ECL = PD x LGD.*

*Here LGD is a net dollar amount. The formula can also be expressed as: ECL = PD x LGD x EAD, where LGD is a rate of loss and EAD (Exposure at Default) is the gross dollar amount of the loan.


Calculating Current Expected Credit Loss (CECL)

RapidRatings’ Term PDs are based on our proven methodology for Financial Health Ratings, a quantitative metric measuring the probability of default over the next 12 months.  Term PDs are extended out from 1-10 years to address the need for PDs over the life of the loan.  Our model is benchmarked on over 30 years of public and private company financial statements; studies of our PD estimations have shown we successfully classified 91% of US corporate defaulters over the past 20 years.


RapidRatings Term Probability of Default Rating for CECL

RapidRatings’ Term PDs can assure your organization is providing reasonable and supportable forecasts for expected credit losses.  RapidRatings offers accuracy for your CECL calculations, in addition to:

  • Probabilities of default for up to 10 years to assess any loan tenor
  • Consistent methodology for private and public obligors on C&I, Small Business Loans, or other corporate lending relationships
  • Robust historical data set for benchmarking containing 30+ years and 300,000+ companies globally, calibrated by industry
  • Automated data feeds to efficiently implement Term PDs into existing or new internal models, as well as integration within other technologies
  • Ratings generated for private companies that can be ingested in mass from financial statements, tax returns, and more

Contact us to evaluate how RapidRatings’ data and analytics can help with your CECL implementation.


Additional Resources

WHITEPAPER: CECL & Term Probability of Default

Learn how this new solution delivers company-specific and pooled PDs on an annual basis out to ten years comprehensively and cost-effectively on any bank’s Commercial and Industrial portfolio or Small Business Loan portfolio, at any scale.

Read Whitepaper

BLOG: CECL, Merton Models and Volatility’s Threat to ALLL Accuracy

While existing CCAR/DFAST models can save money in CECL model development now, are they worth the additional costs down the road?

Read Blog
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