A banker’s guide for CECL compliance and backtesting

The transition to the Current Expected Credit Loss (CECL) accounting standard has introduced new challenges for community financial institutions. Accurate forecasting of credit losses is essential, and backtesting offers a robust solution for ensuring defensible and reliable allowance estimates. By comparing historical forecasts with actual outcomes, backtesting enables institutions to refine their models, improve risk management, and demonstrate CECL compliance with regulatory requirements. This guide explores how backtesting helps institutions validate their CECL models, enhance predictive accuracy, and continuously improve their processes.

Backtesting is a critical tool for assessing the effectiveness of CECL models and improving long-term financial stability. Through short-term and long-term backtesting, institutions can evaluate loan segments, risk profiles, and macroeconomic assumptions. By systematically identifying discrepancies between forecasted and actual losses, community financial institutions can adjust their models to better reflect real-world credit risks. This ongoing process of validation and refinement strengthens both CECL compliance efforts and overall risk management strategies.

Key Topics Covered:

• Importance of backtesting for model validation and regulatory compliance

• Short-term vs. long-term backtesting approaches

• Identifying model biases and improving forecasting accuracy

• Enhancing risk management with backtesting insights

• Applying macroeconomic assumptions and stress testing results