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 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 called SCALE—the Scaled CECL Allowance for Losses Estimator.
Put simply, 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 2007-2008 spurred this change in loss recognition because bank 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).
Just how they do that depends on a number of factors, including 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, and 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 Federal Reserve System at the direction of Federal Reserve Governor Michelle Bowman, is the latest addition to the site and has its own page that contains links to a webinar on the SCALE methodology, the SCALE spreadsheet template and instructions, and frequently asked questions.
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. 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 methodology, and its use should not be considered a “safe harbor,” as examiners will still evaluate the adequacy of a bank’s overall ACL process.
The SCALE page on the CECL Resource Center website, like the parent site, is a work in progress. Still to come is a data spreadsheet featuring the call report data banks that wish to use SCALE need to estimate their CECL-compliant ACL. An Ask the Fed webinar on the SCALE tool, featuring accounting experts from the Federal Reserve, the Financial Accounting Standards Board (FASB) and the Conference of State Bank Supervisors (CSBS), also provides valuable information for banks. Other resources will continue to be added to the site.
Community banks headquartered in the Federal Reserve’s Eighth District with CECL-related questions, or questions about the SCALE tool, should contact Supervision Vice President Allen North at Allen.North@stls.frb.org. Community banks that are headquartered outside the Federal Reserve’s Eighth District should contact their local Reserve Bank.
 The peer data is for banks with assets of $1 billion to $10 billion. Bankers using SCALE may use data sources other than call reports.