Fed’s SCALE Method for CECL: Haze Lifted, Questions Remain

By Josh Stein

Responding to years of calls by ABA for simplification of processes for the current expected credit loss standards, the Federal Reserve introduced its Scalable CECL Allowance for Losses Estimator, or SCALE, method and tool during an “Ask the Fed” webinar this summer. The webinar discussed steps for assessing the appropriateness of using the tool and considerations when using it. Areas where management judgment is needed were emphasized, which should help frame conversations with examiners and auditors.

What is less obvious is whether SCALE is right for your individual institution or not. With that in mind, it appears that SCALE likely will help all 2023 adopters, as it sets a key boundary line on the playing field of CECL analysis.

As with any new accounting standard, expectations around CECL implementation initially are based on the practices of those larger institutions that adopted first in 2020. Because of their sophistication, however, such practice appears to be marking “the complex side of the playing field.” We all knew that there should be a noncomplex side of the field, but the inherent complexity of CECL covered it in a haze and many banks have been frustrated in exploring that direction. With the introduction and endorsement of SCALE, the boundaries for noncomplex banks are being refined, and this should make it easier for all 2023 adopters to find their individual section of the playing field.

Some clarifications ABA has learned since the webinar include:

  • SCALE tool vs. SCALE method: The SCALE method uses proxy expected lifetime loss rates in calculating CECL estimates. The SCALE tool is a spreadsheet based on using proxy expected lifetime loss rates from call report data reported by institutions between $1 billion to $10 billion in assets. The SCALE tool is, thus, restricted to institutions under $1 billion. However, the SCALE method of using proxy loss rates is not restricted.
  • Other regulators have publicly stated that SCALE is an acceptable CECL methodology. That being said, they emphasize that each eligible institution should make a determination as to whether the SCALE methodology is appropriate.
  • Credit risk monitoring activities are not affected (should not change) but rather can inform appropriate qualitative adjustments.
  • Qualitative factors and the related qualitative adjustments are not going away, with both CECL and the interagency guidance providing direction for qualitative factors.

As banks head toward the 2023 adoption of CECL, questions remain regarding how prevalent the use of SCALE will be. Discussions with certain auditors, for example, indicate a level of discomfort and a view that a lower threshold may be more appropriate to move past SCALE. There are also concerns about how granularity in segmentation may need to increase. Most banks, for example, have learned how some restaurants have thrived during COVID while others have struggled. All such restaurants, however, are reported as C&I loans in SCALE.

Similar segmentation issues exist for CRE loans, with hospitality loans having different risk factors from other commercial real estate. As a result expectations related to the QAs above will require significant discussions with examiners and auditors. Overall, however, the introduction of SCALE appears to be a positive development.

If you have any thoughts or question about SCALE, reach out to ABA’s Josh Stein.


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