July 24, 2021 / VOLUME NO. 167
Scaling CECL for Small Banks

Regulators have long maintained that small banks with simple business models could calculate their loan loss allowance using a spreadsheet.

Now, the Federal Reserve has released a method and a templated spreadsheet demonstrating that point precisely. The scaled CECL allowance for losses estimator (SCALE) method and tool is intended to help small, private institutions calculate their allowance for credit losses under the current expected credit loss standard, or CECL, ahead of their 2023 effective date. The standard became effective for most big, public banks in 2020.

Under CECL, banks are required to calculate lifetime losses at origination using both lifetime loss data and an economic forecast — both of which can be costly and daunting undertakings for small banks. To address this, the SCALE method leverages call report data from larger banks currently using CECL to generate an industry or peer proxy of lifetime expected loss rates. The idea is that larger institutions have incorporated historical loss data and economic forecasts into their loss ratios, creating a “free and readily available” data set for expected losses, Federal Reserve officials said in a July 15 webinar. The webinar, tool and an FAQ are all available on the Fed’s website.

Community bank executives plug the loss percentage into the template to create a basis for their own loss rates, then adjust for expected losses on individual loans or any qualitative factors that are unique to their institution based on their own insight and understanding.

“SCALE begins with the use of external data, but the goal is to arrive at an allowance that is tailored to an individual bank’s risk profile,” said Paul Oseland, lead examiner for the Federal Reserve Bank of Kansas City.

The approach and tool come with caveats. It is not a calculator that automatically generates an expected loss ratio. Its usage is limited to less complex institutions, such as commercial banks with common business lines, and to institutions with less than $1 billion in assets. Regulators have no expressed preference for the approach, and executives are still ultimately responsible for ensuring that the bank’s allowance conforms to accounting rules and adequately covers its credit risk. 

Still, with 18 months to go, the SCALE method and tool could be the godsend that some small community banks need.

• Kiah Lau Haslett, managing editor for Bank Director
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