Current Expected Credit Loss Model (CECL) Based on Firm Loan Loss Elasticity

Many small banks are confronted with the problem of meeting the Financial Accounting Standards Board (FASB) standard which requires the estimation of a Current Expected Credit Loss (ASC 326) which replaces the older well-established Allowance for Loan and Lease Losses. The new standard requires that management and preparers must make a forward-looking disclosure of expected loss based on characteristics of the loan portfolio. Moreover, the standard requires that the methodology be well supported for a specific institution and situation. It is expected that smaller institutions lack the experience, modeling expertise, and the ability to afford complex applications. This expected lack and the simplicity and flexibility of the elasticity method is an important reason for applying economic elasticity analysis to the task of estimating credit loss for accounting purposes