This article is part of a series titled “Supervise the financial institutions of our country.
In mid-June, the Federal Reserve issued the Expected Loss Estimator (ELE)a spreadsheet-based tool designed to help community banks calculate their provisions for credit losses under the new Currently expected credit losses (CECL) accounting standard. As with the SCALE tool launched last summer, the ELE will help smaller, less complex banks to comply with the CECL.
Tale of two tools
The SCALE method and accompanying spreadsheet were developed for the smallest community banks, those with less than $1 billion in assets. The method and tool uses peer data derived from publicly available regulatory reports (call reports) from large community banks as a starting point to help smaller banks that do not have complex loan portfolios.
The ELE tool, like SCALE, is designed for banks with less complex loan portfolios, but is aimed at a wider 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 take their historical average annual loss rates on loans, much like they do now, and apply them to the remaining life of loan pools to determine historical charge-off rates to life for provision under CECL.
The ELE tool is Excel-based and can be used as a primary tool to calculate the allowance for credit losses or as a complementary 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 visualized, allowing the user to verify the calculations.
Many options, one goal
The choice of a methodology for calculating expected credit losses rests solely with the bank’s management. When the move to CECL for estimating credit losses was announced, the Fed also noted that it was not a “one size fits all” requirement; it is scalable depending on the size and complexity of a bank. The introduction of SCALE and now ELE for small institutions is concrete proof of our commitment to this commitment..
Full CECL implementation is fast approaching. The new standard is required for years beginning after December 15, 2022; banks following a calendar year will be required to adopt CECL by January 1, 2023. In addition to the SCALE and ELE tools, many other resources such as webinars and supervisory guidance are available for banks at the CECL Resource Center.