Current Expected Credit Losses

Overview

Current Expected Credit Losses is a reserve account that is set up to absorb the losses from a bank loan. FASB requires that banks estimated the expected losses on a loan throughout the life of the loan, and to hold reserves against those expected losses. The account is set up at the initiation of the loan, which means that banks will take an immediate loss on the loan at initiation.

Note that in this case, "expected" means a statistical expectation. That is, it is a probability weighted loss, which means that every loan (other than those to the sovereign) will have an expected loss.

Time Frames

The CECL standard requires expected losses to be calculated over the life of the loan. It identifies the foreseeable future vs the unforeseeable future. The foreseeable future is generally taken to be of a period of 24 months, the period beyond which most considerable it is extremely difficult to do economic forecasts.

As such, most banks will forecast losses for the foreseeable future using economic forecasts of the current cycle, and will use through the cycle estimates of loss beyond the foreseeable future.