Credit Losses: Tools for Your Institution

The Federal Reserve has worked the last several years on tools to assist with the implementation of the accounting standard for Current Expected Credit Losses (CECL) by financial institutions. Back in July 2021, the Federal Reserve staff introduced the first tool, Scaled CECL Allowance Losses Estimator (SCALE) and in June, the second tool, Expected Loss Estimator (ELE) was released.

Both tools are available now for banks to utilize at the CECL Resource Center. Learn more about the tools below.

SCALE

• Simple and practical method for estimating the allowance for credit losses for small community banks with total assets of $1 billion or less.
• SCALE utilizes proxy allowance coverage ratios from the Call Report Schedule RI-C. Quarterly, the Federal Reserve publishes RI-C data for all filers from $1 billion to $10 billion for use with the tool.
• The use of SCALE does not ensure compliance with U.S. GAAP or other regulatory requirements.
• Management must make adjustments based on the facts and circumstances of each bank and document the rationale for key judgement.
• Examiners will still evaluate the adequacy of the allowance for credit losses when utilizing the SCALE method.

• Intended for community financial institutions that have determined the Weighted Average Remaining Maturity (WARM) methodology is appropriate to use.
• Excel based tool that automates the WARM method to estimate an asset’s pool allowance for credit losses.
• Relies on the financial institution’s loan level data and assumptions.
• Like SCALE, ELE does not ensure compliance with U.S. GAAP or other requirements.
• Community financial institutions are not required to use ELE.
• At each financial institution, examiners will continue to evaluate the management of the allowance for credit losses based on based on the credit quality of financial assets and the documentation of key judgments.

When deciding on which tool or method your institution should consider when implementing CECL, it is important to remember that bank management is responsible for ensuring that the method used in the loss estimation process is appropriate given a bank’s size, complexity and risk profile. Bank management is not required to use these tools or methods when implementing CECL, but any method chosen should be well documented and supported by management rationale.

Do you have questions about CECL implementation or the SCALE or ELE tools? Here at the Richmond Fed your supervisory relationship team can assist you with any questions.