Federal Reserve Releases CECL SCALE Model

Last month brought good news for small community banks: The Federal Reserve Bank rolled out its Scaled CECL Allowance for Losses Estimator (SCALE model), which is intended to simplify the process of calculating current expected credit losses (CECL) and the resulting allowance. It can be used by community banks with assets under $1 billion.

Included in the FASB Accounting Standards Update 2016-13, current expected credit losses (CECL) became effective for…small public businesses and all non-public businesses. For calendar years, this new standard is effective January 1, 2023. Financial institutions need to have their CECL methodologies developed and initial calculations completed by December 31, 2022, to determine the impact of adopting CECL and to report the findings in 2023 call reports.

The SCALE model is an Excel-based model that includes the required components of CECL, including the use of an historical loss rate, current economic condition factors, and forecasted future economic factors. The model leverages call report information and institution-specific details to estimate credit losses. In its press release, the Federal Reserve states that if a bank uses the SCALE model, bank management must use judgement to further adjust proxy expected lifetime credit loss rates to reflect bank-specific facts and circumstances. Only then can banks arrive at a final Allowance for Credit Loss estimate that adequately reflects their loss history and credit risk in their portfolio. While this requires some specific analysis by the financial institution, the ability to use call report information as a starting point could simplify the process.

The SCALE model joins a host of options small community banks will evaluate as they determine which methodologies and models they will use to implement CECL for the various segments of their loan portfolios. Financial institutions should access the information and resources provided by the Federal Reserve to determine if the SCALE model might work for them. The following are useful links that provide more information:

• Ask the Fed Webinar – CECL: Scaled CECL Allowance for Losses Estimator (SCALE) Method (July 15, 2021)
• SCALE Tool
• SCALE Tool Instructions
• SCALE Tool Frequently Asked Questions

Marcum’s Financial Institution Services team continues to maintain up-to-date knowledge of CECL and assists clients in interpreting technical guidance as it is issued. We are also assisting clients in evaluating proposed methodology and software solutions needed to efficiently implement CECL. For additional information on CECL and the SCALE model, please contact Marcum’s Financial Institution Services Group.