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Federal Reserve releases new Expected Losses Estimator tool to aid in CECL adoption

June 17, 2022 Article 1 min read
Ryan Abdoo Kate Krones
Released June 16, 2022, the Federal Reserve’s new spreadsheet-based tool, known as the Expected Losses Estimator (ELE), is intended to assist community financial institutions that have yet to adopt CECL.
Business professional using their laptop computer.ELE is an alternative to the Scaled CECL Allowance for Losses Estimator (SCALE), which was released in 2021. Similar to SCALE, ELE is an Excel-based tool intended to aid community institutions in estimating reserves under CECL. However, this tool differs in that it uses a financial institution’s own loan-level data and management assumptions rather than the data of other institutions. The tool, instructions, and FAQs are available on the Federal Reserve’s CECL Resource Center website.

ELE was created to help alleviate concerns about operational difficulties related to CECL implementation for community institutions. The Federal Reserve regulators discussed the new tool during an “Ask the Fed” webinar on June 16, 2022.

Areas discussed include the following:

  • ELE is an automated calculation of the Weighted-Average Remaining Maturity (WARM) method, with fully viewable formulas to provide transparency of the calculation. The method relies on the institution’s own data and assumptions including loan-level data, loan segmentation, loss rates, prepayment rates, and payment frequency.
  • As with SCALE, the regulators emphasized it’s not a regulator-preferred method. Management remains solely responsible for determining whether the WARM method is an appropriate method.
  • The use of this tool is not limited to institutions under $1 billion in assets. It’s available for any institution that determines the WARM method is appropriate.
  • Institutions aren’t limited to using loan segments reported on the Call Report. This allows flexibility to separately address any loan segments identified by management that share similar characteristics.

For further insight into how to adopt this tool for your organization or to begin discussions on a pre-implementation model validation, contact our team today.

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