Current Expected Credit Loss (CECL) Scenarios Service
Oxford Economics' solution for projecting expected credit losses to meet CECL accounting standards
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What is CECL?
The FASB’s Current Expected Credit Loss (CECL) standard, which affects banks and other lenders, requires a comprehensive approach to the provision for credit losses. The CECL accounting standard relies not just on historical data of past loan performance, it also demands that organisations consider the current economic climate and make reasonable and supportable forecasts about what might happen in the future. This shift can be challenging for lenders, as it requires modelling different economic outcomes – essentially, “what-if” scenarios – to capture potential risks alongside a central baseline forecast as an essential part of their CECL models.
Our bespoke scenarios for CECL accounting
With over 35 years of independent forecasting and risk analysis experience, we are uniquely placed to assist companies with their CECL requirements. Our CECL scenarios service leverages our validated international and regional macroeconomic models and advanced risk-tracking tools to provide an unbiased view of potential upside and downside risks to the macroeconomic outlook and local forecasts for all 50 states and 382 metro areas of the United States and globally. By assigning clear probabilities to these outcomes, we offer precise scenario forecasts that reflect the current balance of risks, which clients can use when calculating their current expected credit losses under CECL.
Baseline, upside and downside macroeconomic scenarios
We provide scenario results spanning the probability distribution of forecasts and covering the expected lifetime of assets. Our robust and internally consistent modelling capabilities allow us to cover international macroeconomic variables, as well as state and metro-level US impacts. Our Severe Downside CECL scenario is comparable in severity to the Federal Reserve’s Severe Adverse CCAR scenario.
Extensive reporting
The report accompanying our scenarios details changes in our baseline forecast against the previous update and movements in the balance of risk based on our analysis of current trends. We also provide a description of key topical risks, our scenario methodology and the impacts of the alternative scenarios on the US economy and financial markets.
Regular updates
To enable timely provision for credit losses, our CECL scenarios are updated quarterly to reflect emerging risks and changes to the base case. Subscribers to our wider offerings can also benefit from more regular updates to our baseline forecast and topical research briefings.
Comprehensive variable coverage
We provide macroeconomic and financial variable outputs that cover the key drivers of impairment. Fully consistent scenario results are available both at a national level and for all US States and Metropolitan Statistical Areas (MSAs).
The CECL scenarios service you can trust
Why use macroeconomic scenarios for current expected credit loss calculations?
In the early years – when many were still asking, ‘what is CECL?’ – various approaches to meeting CECL accounting standards were adopted. Today, it is increasingly common to use multiple scenarios to assess expected credit losses. This CECL methodology allows institutions to incorporate a range of potential outcomes into their CECL calculations, ensuring that diverse risks are considered, rather than depending on a single forecast. With auditor approval and recent episodes of macroeconomic volatility, we anticipate this multi-scenario approach will become the industry standard.
For the baseline forecast – which has the highest probability attached – our clients benefit from our industry-leading forecasts, produced by a team of more than 400 full-time economists and analysts. Our commitment to quantitative rigour, combined with the calibre of our staff, consistently produces reliable results, as evidenced by our top multi-year rankings in various forecast accuracy surveys and business awards.
How do we construct our CECL scenarios?
Our methodology for constructing forward-looking distributions is similar to the approach used by major central banks to assess risks around their central projections. We use our 35-year history of forecasts to construct an objective measure of forecast uncertainty for key economic and financial variables in the form of a probability distribution.
Based on these robust distributions, we derive coherent economic scenarios and associated probabilities using our economic models. Crucially, our approach ensures that the only changes to scenarios from quarter to quarter are due to a transparent assessment of emerging or receding risks. This results in relatively stable scenario projections from quarter to quarter, which minimises volatility in our clients’ profit and loss accounts.
CECL scenarios that everyone can understand
We know that CECL scenarios are used by a wide range of stakeholders, including non-specialists. As a result, we focus on providing transparency around scenario results, making them accessible and understandable for everyone from auditors and risk managers to broader internal stakeholders and the C-suite.
Alongside our data, we provide detailed reports that clearly outline the assumptions behind the baseline and scenarios. We also provide extensive ongoing support, including direct access to our production team for ad-hoc queries, assistance with auditor requests, and a dedicated account manager to field questions and connect you with our wider organisation where relevant.
“CMHC’s Stress Testing and ORSA team has started this year using Oxford Economics for the purpose of stress-testing. Our experience has been very positive. The software is sound, intuitive and user friendly. But most of all, it allows the user to understand the links between the variables and for a certain degree of customisation.”
“Services provided are always delivered timely according to the agreed timetable. Output is solid and in discussions OE has shown to be very responsive and proactive. Turnaround time is quick.”
“We wanted to bring our climate assumptions and scenarios more in line with those used by central banks in their climate stress test analysis, so we have worked with Oxford Economics to apply their climate macro model to our productivity, GDP and inflation forecasts.
Oxford Economics has always been available to respond to our queries and provided insightful explanations for the impact of carbon pricing on macroeconomic activity in their model. We are very satisfied with their rigorous approach in modelling climate change and are happy to have collaborated with them.”
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