Current Expected Credit Losses - Introducing the SCALE Method
On July 15, 2021, the Federal Reserve introduced a method and tool that can aid community banks with less than $1 billion in total assets in implementing the Current Expected Credit Losses accounting standard. Federal Reserve staff developed the Scaled CECL Allowance for Losses Estimator method and tool for smaller community banks to consider in estimating their allowances for credit losses under CECL. The introduction of this tool was presented as part of an “Ask the Fed” session. The session includes information about the tool and method, including a walk-through, and the recorded webinar remains available for reference as an archived call.
The SCALE tool is a simple, spreadsheet-based method to calculate CECL-compliant ACL. The SCALE method utilizes and leverages industry or peer data from the Call Report as the starting point for estimating an ACL. The tool uses publicly available data from Schedule RI-C of the Call Report to derive the initial proxy for expected lifetime loss rates. If a bank decides to use the SCALE tool, a bank must still apply qualitative adjustments, reflecting the bank’s unique facts and circumstances. Bank management remains responsible for ensuring that the bank’s allowances accurately reflect the credit risk in its portfolio and loss history.
The SCALE method is one of many potentially acceptable CECL methods that a bank may use to estimate its ACL. Further, the SCALE method is not a regulator preferred method and does not ensure compliance with U.S. general accepted accounting principles (GAAP) or any other regulatory requirement. The SCALE tool cannot be used by institutions with assets greater than $1 billion. Examination staff will continue to review and evaluate the overall ACL process, inclusive of any methodology chosen and the tools used, in evaluating risk management practices. Please contact your portfolio central point of contact at this Reserve Bank if you have any questions.
Helpful resources:
SCALE method and tool
Ask the Fed (current and archives)
Supervision Outreach CECL Resource Center
