In mid-June, the Federal Reserve released the Expected Losses Estimator (ELE), a spreadsheet-based tool designed to help community banks calculate their allowances for credit losses under the new Current Expected Credit Losses (CECL) accounting standard. As with the SCALE tool released last summer, the ELE will assist small and less complex banks in complying with CECL.
Tale of Two Tools
The SCALE method and its accompanying spreadsheet tool were developed for the smallest community banks—those with less than $1 billion in assets. The method and tool use peer data derived from publicly available regulatory reports (Call Reports) of larger community banks as a starting point to assist small banks that don’t have complex loan portfolios.
The ELE tool, like SCALE, is designed for banks with less complex loan portfolios, but is aimed at a broader range of community banks than SCALE. The ELE tool essentially automates an existing CECL methodology, the Weighted Average Remaining Maturity (WARM) methodology. Under the WARM method, financial institutions use their average annual historical loss rates on loans, much like they do now, and apply them to the remaining life of the loan pools to determine lifetime historical charge-off rates for the allowance under CECL.
The ELE tool is Excel-based and can be used as the main tool in calculating the allowance for credit losses or as a supplementary tool to other CECL processes. The tool uses a bank’s own loan-level data and allows for qualitative adjustments. The code and formulas used to construct expected credit losses can be viewed, which allows the user to verify calculations.
Multiple Options, One Goal
The choice of a methodology for calculating expected credit losses is solely up to bank management. When the move to CECL for estimating credit losses was announced, the Fed also noted that it is not a “one size fits all” requirement; it is scalable based on a bank’s size and complexity. The introduction of SCALE and now the ELE for smaller institutions is concrete evidence of our commitment to that pledge.
Full implementation of CECL is just around the corner. The new standard is required for years beginning after Dec. 15, 2022; banks that follow a calendar year will need to adopt CECL by Jan. 1, 2023. In addition to the SCALE and ELE tools, numerous other resources such as webinars and supervisory guidance are available for banks at the CECL Resource Center.