An end to CECL double-counting gives a tailwind to bank M&A

The Financial Accounting Standards Board has approved a long-anticipated fix to the current expected credit loss standard that could reshape bank merger and acquisition activity. The change corrects the so-called “day one double counting” of credit losses that has penalized acquirers since CECL’s introduction.

Although the update is officially effective for fiscal years beginning after Dec. 15, 2026, early adoption is permitted, meaning some institutions may benefit right away.

What was broken?

Under CECL, banks must estimate and record lifetime credit losses when originating or acquiring loans. For acquired loans, this meant: recognizing expected credit losses already reflected in the fair value of the loans, and recording an additional allowance for credit losses and corresponding expense on those same loans.

This led to double-counting the same credit risk, resulting in lower initial earnings, sometimes turning a profitable quarter into a loss; reduced regulatory capital, often by 60 to 130 basis points of the acquired loan portfolio; and distorted yield reporting, as the ACL was amortized through interest income over time.

The solution: gross-up accounting

FASB’s fix expands the “gross-up” method — previously used only for purchased credit deteriorated, or PCD loans — to all purchased seasoned loans, or PSLs. Here’s how it works:

The ACL is still recorded at acquisition.
Instead of recognizing an immediate expense, the ACL is added to the loan’s cost basis.
This eliminates the day one hit to earnings and regulatory capital.

The gross-up approach better aligns CECL accounting with M&A economics. It simplifies analysis, improves yield comparability between originated and acquired loans and makes credit coverage ratios more meaningful. Investors and bank management alike gain a clearer view of ongoing credit performance rather than a one-time accounting distortion.

Implications for bank M&A

In bank acquisitions, goodwill is often created when the purchase price exceeds the fair value of net assets. Since goodwill doesn’t count toward regulatory capital, it can be a constraint. CECL’s day one double-counting made this worse.

In practical terms, a bank acquisition with a $1 billion loan portfolio might otherwise have recorded an additional ACL of $6–$13 million (60–130 basis points), even though those losses were already priced into the loans. That hit would immediately reduce regulatory capital.

Under the new rule, capital can now be preserved, improving post-merger capital ratios and enhancing deal viability. Moreover, there is no artificial drag on earnings or distortion in yield reporting. Combined with a lower interest rate environment, the new rule may open the door for renewed merger discussions, particularly among mid-sized and community banks.

Since its rollout in 2020, CECL has imposed significant costs on banks while offering limited benefits to investors. FASB’s update is a welcome improvement. By eliminating the double-counting of credit losses, it eases capital pressure and simplifies financial reporting.

Combined with falling interest rates, this change could further help reignite M&A activity across the banking sector. For banks weighing acquisitions in the next rate cycle, this may be the moment to revisit deals that once looked too costly.

ABA has long advocated for this fix, emphasizing that CECL’s day one treatment overstated credit risk and discouraged sound consolidation. This update reflects years of collaborative effort between the industry and FASB to ensure accounting standards support — rather than hinder — responsible growth.

ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.