CECL — Day 1 Allowance for Credit Losses on Originated Loans (ASC 326)

💡 Accountant's Note

Under ASC 326 (CECL — Current Expected Credit Losses, effective for large public banks January 1, 2020), the allowance for credit losses must reflect the LIFETIME EXPECTED CREDIT LOSS on the ENTIRE portfolio — from the moment of origination. This is a fundamental departure from the prior incurred loss model (which only recognized losses when they were probable of having been incurred). Day 1 CECL: when a bank originates $1B in auto loans in Q1, it must immediately recognize the expected lifetime losses on that portfolio — perhaps 1.5–2.0% of the balance = $15–20M. This front-loads credit losses vs. the old model (which would have deferred recognition until delinquencies actually appeared). The CECL adoption created enormous Day 1 allowance increases — regional banks increased allowances by 40–120% on adoption. The COVID-19 pandemic dramatically illustrated CECL's forward-looking nature: banks increased allowances massively in Q1 2020 (before significant actual charge-offs occurred) by incorporating economic forecasts into their models.