Expected Credit Loss (ECL) is the probability-weighted estimate of credit losses over a financial instrument's life, required under IFRS 9 and the FASB's CECL standard (ASU 2016-13) — replacing the old 'incurred loss' model with a forward-looking allowance.
ECL = PD × LGD × EAD, discounted at the effective interest rate over the measurement horizon. IFRS 9 (IASB, effective 2018) and FASB ASU 2016-13 — the Current Expected Credit Loss (CECL) standard (effective for large public banks in 2020, all banks by 2023) — fundamentally shifted how financial institutions recognize and reserve for loan losses. The old incurred-loss model (IAS 39 / ASC 450) delayed loss recognition until losses were 'probable and estimable.' ECL/CECL requires banks to recognize lifetime expected losses at loan origination — recording a day-one allowance even for healthy loans based on forecasted economic conditions, not just historical experience. FASB's ASC 326 codification (fas.org/jsp/FASB/Page/LandingPage&cid=1176168232528 — accessible at fasb.org via ASU 2016-13) governs U.S. implementation. The SEC reviews CECL disclosures under ASC 326 for public companies. For small business borrowers, CECL has indirect effects: banks must model forward-looking economic scenarios into their allowances, potentially increasing capital costs during economic downturns and reducing credit availability. Conversely, in improving economic environments, CECL releases can boost bank capital ratios. The OFR (Office of Financial Research) and Federal Reserve publish analysis of CECL's macroprudential effects (financialresearch.gov, federalreserve.gov/pubs).
Both adopt a forward-looking expected loss model, but differ in scope. CECL (FASB ASU 2016-13 / ASC 326) requires lifetime ECL for all financial assets at amortized cost from day one. IFRS 9 uses a two-stage approach: 12-month ECL for performing loans (Stage 1) and lifetime ECL only when credit risk has significantly increased (Stage 2) or default has occurred (Stage 3). CECL is generally more conservative because it applies lifetime ECL immediately.
Indirectly yes. Higher day-one allowances under CECL increase the capital cost of originating loans. Lenders may factor this into pricing — particularly for longer-term loans where lifetime losses must be estimated further into the future. The impact is larger for riskier borrower segments where lifetime PD exceeds one-year PD by a wide margin.
FASB ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) is available at fasb.org. The codified standard is ASC Topic 326. The FASB also publishes implementation resources and a CECL Resource Center at fasb.org/page/PageContent?pageId=/projects/recentlycompleted/cecl.html.