The Fed Offers New Tool to Meet Accounting Change

The Federal Reserve recently unveiled a tool to help small community banks—those with less than $1 billion in assets—comply with a new accounting standard that they are required to implement by 2023. The standard is the current expected credit loss (CECL) methodology for setting banks’ loan loss allowances, and the tool is the Scaled CECL Allowance for Losses Estimator (SCALE).

Why CECL?

Under CECL, banks will be required to set aside funds to cover losses expected over the life of an asset when it is booked, rather than when it becomes probable that a loss will occur. The financial crisis of 2007-08 spurred this change in loss recognition, because banks’ balance sheets did not adequately reflect the risks inherent in loan portfolios. Under CECL, banks will rely on historical experience, current conditions and “reasonable and supportable forecasts” in setting aside loan loss reserves, formally called the allowance for credit losses (ACL).

How banks go about doing this depends on a number of factors, including bank size and complexity. The nation’s largest publicly traded banks began complying with CECL in 2020. The nation’s community banks, thrifts and credit unions are required to comply by January 2023, and regulators have been working with them to ease the transition process.

Helping Community Banks Make the Transition

The St. Louis Fed has been at the forefront of these efforts. In December 2019, we launched the CECL Resource Center. Designed as a one-stop resource for community bankers, the website features CECL news and updates, supervisory guidance, research and analysis, and links to webinars and other tools. SCALE, which was developed by a team of experts from across the Fed System at the direction of Gov. Michelle Bowman, is the latest addition to the site. A dedicated page contains links to a SCALE method webinar, the SCALE spreadsheet template and instructions, and frequently asked questions.Federal Reserve webinars can only be accessed by banks.

In a nutshell, the SCALE method simplifies the process of computing the ACL by using peer data derived from the publicly available regulatory reports (call reports) of larger community banks as a starting point.Peer data are for banks with assets of $1 billion to $10 billion. Bankers using SCALE may use data sources other than call reports. Banks can then make adjustments to reflect their own circumstances without the need to work with costly third parties. 

Community banks are not required to use the SCALE method. Also, its use should not be considered a safe harbor method, as examiners will still evaluate the adequacy of a bank’s overall ACL process.

Scaling Up

The SCALE page on the CECL Resource Center website, like the parent site, is a work in progress. Still to come is a spreadsheet featuring the call report data that banks opting to use the SCALE method will need to estimate their CECL-compliant ACL. An Ask the Fed webinar on the SCALE tool featuring accounting experts from the Fed, the Financial Accounting Standards Board and the Conference of State Bank Supervisors also provides valuable information for banks. Other resources will continue to be added to the site.

Notes and References

1. Federal Reserve webinars can only be accessed by banks.
2. Peer data are for banks with assets of $1 billion to $10 billion. Bankers using SCALE may use data sources other than call reports.

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