While many bankers are working on the adoption of the accounting standard for current expected credit losses (CECL), they may find detours on their path as well, including some CECL myths. When we started with CECL, the initial expectation from most of the big banks was that there would be a significant increase in reserves overall. Then, the pandemic hit and credit loss reserves increased dramatically — from $13.9 billion to $52.7 billion. But, as of Q1 2021, $14.5 billion of reserves had been released, according to the FDIC Quarterly Banking Profile. So, what is going on with the reserves? The September 9 report by the Congressional Research Service notes that it remains very difficult to determine which changes in reserves are a result of the pandemic and which are driven by CECL.

Given that it’s difficult for the experts to separate the impacts of COVID and CECL on reserves, it is not surprising to hear that certain myths have surfaced. We bust four CECL myths to ensure that you are well-informed as you implement CECL.

Myth 1: CECL will be delayed. At a recent year-end presentation by the accounting firm Plante Moran, 10% of the audience believed that CECL would be further delayed. While anything is possible, a further delay in CECL is quite unlikely. The standard became effective for most SEC filers in fiscal years and interim periods beginning after Dec. 15, 2019 (with temporary relief in the CARES Act). For all others, it takes effect in fiscal years beginning after Dec. 15, 2022.

Regarding when regulatory agencies expect you to start working on CECL, it seems to vary by geographic region. We have heard about requests for CECL implementation plans by regulatory agencies on the coasts, while others in the Midwest report being told that running in parallel for two quarters is sufficient. Regardless of where you are located, plan on applying the CECL accounting standard. Myth busted!

Myth 2: CECL will cause your reserves to dramatically increase. We’ve been actively working with community banks on CECL since 2018. Now, nearly four years later, most community banks report that their reserve rate hasn’t materially changed. What has changed is the proportion of the reserve based on qualitative factors. Generally, when compared to incurred loss, qualitative factors are smaller under CECL as the CECL models are more inclusive than incurred loss. Obviously, if you are currently under-reserved compared to your peers for loans of similar characteristics, you are likely to see your reserves increase. However, most successful community banks are reasonably prudent and are likely to expect minimal changes in their final reserve rate (assuming similar economic conditions). Myth busted!

Myth 3: CECL requires lots of data. It is true that when discussions with CECL started, we were among the very many who advised that you focus on your data. After all, CECL requires an adequate history of loss data. Over the years, we’ve found that most successful community banks don’t have a deep history of losses. Furthermore, with the release of SCALE, the use of supplemental data has come into full acceptance. If you have access to relevant supplemental data (assuming no deep history of losses), you don’t need to spend time and energy cleaning and auditing historical data. Instead, focus on cleaning your current period data and identifying the right supplemental data for your institution. Myth busted!