A recent discussion among members of the Financial Accounting Standards Board (FASB) has spotlighted significant challenges faced by community banks under the Current Expected Credit Losses (CECL) accounting standard, which was implemented for these institutions in 2023. Community bankers and industry observers have voiced concerns that CECL imposes disproportionate costs and operational burdens on smaller banks without delivering commensurate benefits.

CECL requires banks to estimate and reserve for all expected credit losses over the entire life of a loan at the origination stage, a departure from the previous incurred-loss methodology. Under the earlier standard, banks recorded loan-loss reserves only when losses became probable based on recent developments. The shift to a forward-looking model means that institutions must now undertake complex forecasting and maintain extensive data and validation systems from the outset of lending.

Critics highlight that many of CECL’s implementation expenses are fixed, leading to a heavier relative burden on smaller banks that have fewer resources compared to larger institutions. For example, one community bank reported spending approximately $475,000 to implement CECL, with ongoing annual compliance costs exceeding $260,000. These recurring expenses cover additional staffing, vendor models, software, and validation processes. Prior to CECL, this bank maintained its loan-loss reserves using a simple spreadsheet, which required minimal time and cost.

Another small institution noted that the cost of vendor models and related CECL compliance over a year surpassed its gross write-offs on bad loans during the same period. Despite these substantial investments, many banks still rely heavily on managerial judgment—often adjusting model results—similar to their approach under the prior incurred-loss system. Industry feedback suggests that more than half of the reserve determinations continue to depend on subjective adjustments, calling into question the added value of expensive models amid increased complexity.

The timing and structure of CECL’s forward-looking reserve requirements have also been criticized for generating unintended consequences during economic downturns. Since CECL mandates immediate recognition of lifetime expected losses, banks must significantly increase reserves when earnings are already under pressure. This dynamic may constrain lending at times when credit availability is most critical, potentially exacerbating economic slowdowns.

Additionally, CECL’s approach to reserving for future losses is said to contribute to volatility in financial reporting, as reserve levels fluctuate more dramatically in line with credit cycle shifts. Some experts argue that capital requirements, rather than accounting standards, are better suited to address unexpected losses and provide needed financial buffers.

Advocates for the previous incurred-loss model maintain that it was simpler, more transparent, and effectively aligned with credit risk practices. They contend this method posed minimal costs to smaller banks while allowing regulators to maintain sufficient capital safeguards. Following several decades of use without major issues, many community banking stakeholders believe that CECL has failed to serve smaller institutions and urge FASB to reconsider allowing them to revert to the incurred-loss approach.